Research

With Peter Birch Sørensen.

Abstract: This chapter explains how we have estimated the future damage costs for Denmark of the ongoing global warming. Since the Green Net National Income seeks to describe how changes in the Danish environment affect the welfare of the Danish population, we calculate the costs of global warming for Denmark as Denmark’s estimated share of the global damage costs caused by global greenhouse gas (GHG) emissions. The global damage costs are estimated using the average carbon price in a recent survey among international experts on carbon pricing, and Denmark’s share of the global damage costs is assumed to equal Denmark’s share of global GDP, since a large part of the damage costs will take the form of output losses. We find that Denmark’s share of the global costs of global GHG emissions increased from roughly 1 percent of Net National Income (NNI) in 1990 to more than 3 percent of NNI in 2020.

With Janek Bligaard Eskildsen, Jens Villiam Hoff, Jette Bredahl Jacobsen, Ole Gravgaard Pedersen, Martin Møller Boje Rasmussen, Peter Philip Stephensen, Peter Birch Sørensen.

Abstract: Through decades, the natural sciences have documented some troubling links between the growing economy and damages to the environment, most prominent of which are global warming and the loss of biodiversity. Recent years have however shown that the road from identifying the problems to action is slow and complicated to navigate: The goal to reduce greenhouse gas emissions does not stand alone; rather it is weighed against numerous other policy objectives. This paper first outlines a way of measuring the links between economic activity and the environment: The Green GDP. This measure attempts to measure the environmental damages in the same metric as other economic activity, thus informing us on whether or not economic growth comes at the expense of the environment. Next, the paper introduces a research project aimed at developing the GREEN REFORM model that can simulate the environmental effects of economic policy as well as the impact of environmental policy on the economy. While the Green GDP is an indication of the environmental costs of current and past economic activity, the GREEN REFORM model can be used for evaluation of future scenarios and policy interventions. Finally, the paper presents an analysis of the political barriers to adopting the above-mentioned tools in decision-making in a Danish context. The paper argues that while there is some demand for the tools, there is a potential for significant opposition in the form of political-economy constraints. 

With Peter Birch Sørensen.

Abstract: Artiklen forklarer, hvordan de fremtidige skadeomkostninger for Danmark ved den globale opvarmning er opgjort i forbindelse med beregningen af Danmarks grønne nationalindkomst (GNNI). Formålet med de miljøkorrektioner af BNP, der foretages for at komme frem til GNNI, er at belyse, hvordan ændringer i miljøtilstanden i Danmark påvirker den danske befolknings velfærd. Vi opgør derfor omkostningerne for Danmark ved de globale drivhusgasudledninger ud fra et skøn for, hvor stor en andel af de globale skadeomkostninger ved udledningerne, der vil skulle bæres af Danmark. De globale skadeomkostninger estimeres ved brug af en CO2-pris baseret på internationale ekspertskøn, og Danmarks andel af de globale skadeomkostninger antages at svare til Danmarks andel af det globale BNP, da omkostningerne i stort omfang vil tage form af produktionstab. Vi finder, at Danmarks andel af de globale skadeomkostninger er steget fra godt 1 pct. af nettonationalindkomsten (NNI) i 1990 til over 3 pct. af NNI i 2020.

With Peter Birch Sørensen.

Abstract: To study the economic and welfare consequences of alternative time paths towards net zero CO2e emissions, we develop a multi-sector dynamic computable general equilibrium model of an open economy with heterogeneity in abatement costs across sectors and firms and with adjustment costs in the adoption of abatement technologies and other types of investment. We measure the welfare costs of following the simple rules for emissions reduction observed in practice rather than the optimal national policy rule prescribed by economic theory. In an undistorted economy subject to a carbon budget, the theoretically optimal climate policy is a "Hotelling rule" where the carbon tax rate increases year by year at the real rate of interest. However, when some consumers are credit-constrained, it is optimal to deviate from the Hotelling rule and use carbon taxation to redistribute income towards poor hand-to-mouth consumers. Nevertheless, in aggregate terms very little welfare is lost by following a Hotelling rule or a linear emissions reduction path rather than the optimal time path for carbon taxes when climate policy is subject to a carbon budget. The optimal carbon tax path towards a simple end-point target for net zero emissions implies a much higher welfare cost per ton of accumulated GHG emissions than a policy constrained by a carbon budget.

With Martín Gonalez-Eiras

Abstract: The design of social security systems has implications not only for households' saving and labor supply choices, but also for the political support of intergenerational transfers. We examine the effects of making pension benets dependent on - or independent of - labor market participation, as well as the level of redistribution, on the social security tax rate, labor supply, and capital accumulation. We conduct two numerical evaluations of the model's performance. First, it can explain almost two thirds of the observed increase in pension spending following Argentina's 2005-2010 reforms aimed at universalizing coverage. Second, the model predicts that a persistent shift in work preferences following the COVID-19 pandemic in the U.S. would result in a 1.8 p.p. increase in the social security tax rate.

With Janek Bligaard Eskildsen & Peter Stephensen.

Abstract: Expansion of intermittent, renewable energy is a key strategy for decarbonizing economic activity. To estimate the economic consequences of higher shares of intermittent energy supply, we develop a dynamic bottom-up model for electricity and district heat systems that can be directly integrated with large-scale general equilibrium models. The bottom-up model derives market supply of electricity and district heat from aggregation of heterogeneous energy producing plants, taking technological constraints in the energy system into account. Compared to previous models of electricity and district heat systems that generally rely on linear optimization problems, we use smoothing techniques to specify the model as a square nonlinear system of equations. Our smoothing approach allows us to derive closed-form solutions for supply and demand decisions, thus reducing the numerical problem to identifying equilibrium prices in electricity and heat markets. Furthermore, to capture the issues related to intermittency in energy production, the model solves for intra-yearly equilibria taking into account hourly variation in generation capacity of intermittent plants, demand for electricity and heat, and capacity of transmission lines.

Finally, we apply the model to the case of Denmark. We calibrate the model to the base year 2019 and show that the model reproduces key characteristics related to intermittency, such as relatively low average prices of wind energy. We simulate the effects of increasing the domestic \CO2-e tax and compare the results from a computable general equilibrium model with and without integrating the bottom-up model. While the two models predict similar aggregate reductions in emissions, they provide different predictions for where these reductions occur. This has important implications e.g. for the estimation of tax revenue generated by the carbon tax.

With Janek Bligaard Eskildsen

Abstract: Reductions in greenhouse gas emissions associated with generation of electricity is largely achieved through expansion of intermittent renewable energy. As opposed to dispatchable supply, production of intermittent energy fluctuates with natural conditions as wind speed and cloud cover, which makes it challenging to balance demand and supply. Energy storage can solve this challenge by moving excess production of renewable energy in low price hours to high price hours with peak demand and shortfalls in renewable production. However, assessing the value and potential of energy storage can be difficult as it requires detailed information on existing generation technologies, access to trade in electricity, and potential of demand flexibility technologies. We evaluate the effects of electricity storage in Denmark in a technology-rich model with detailed information on all three. Compared to previous estimates, we find that electricity storage lowers average electricity prices and greenhouse gas emissions significantly. This happens even though storage technologies are net consumers of energy. Furthermore, although electricity storage increases the market value of technologies based on intermittent energy sources, electricity storage is, in itself, unlikely to become profitable before 2030 in a Danish context. This is because other strategic substitutes for mitigating intermittency - such as trade in electricity and dispatchable back-up capacity - reduces the scope for arbitrage for electricity storage.

With Jonathan Leisner and August T. Nielsen

Abstract: The paper develops a method for integration of technology data on emissions abatement in economic models. The methodology improves the ability of computable general equilibrium models to estimate abatement costs which is central for devising efficient policies. The proposed method is compatible with a large range of technology data including simple end-of-pipe technologies as well as more complex versions of input-displacing technologies. The method remedies a number of issues with existing methods: First, it distinguishes between end-of-pipe and input-displacing technologies, and shows that these are substitutes; Adopting end-of-pipe technologies reduces emissions related to inputs, thus making relatively dirty technologies cheaper relative to competing clean input-displacing ones. Second, it ties the use of technologies to the relevant use of resources, thus making the costs of technologies a function of general equilibrium prices. For instance, if a large portion of abatement technologies are related to electrification, potential feedback effects from electricity prices are taken into account. Third, it features sluggish technology adoption both across firms and over time. Fourth, we allow technologies to be overlapping, such that adoption of one technology reduces the potential of another. We develop calibration methods that allow us to fit the model to input-output data and technology data, including the degree of adoption of technologies. We illustrate core features of the framework in simulations.