Increasing returns to scale in energy-intensive sectors and its implications on climate change modeling

Zili Yang

Energy Economics, 2019, vol. 83, issue C, 208-216

Abstract: Increasing returns to scale (IRS) phenomena are widely present in economies, and integrated assessment models (IAMs) for climate change generally assume constant returns to scale (CRS). This paper studies the connection between IRS in energy-intensive sectors and the regions' attitude towards climate change. In a model of detrimental (negative) externality, we proved that if some agents' activities related to externality generation exhibit IRS, their optimal target in the efficient externality provision can be very close to their inefficient non-cooperative Cournot-Nash equilibrium position. The numerical simulations in this paper confirm the analytical conclusion. The analytical results point out the potential biases of IAMs under the CRS assumption and provide a better explanation of difficulties in international climate negotiations. Finally, the paper offers some policy suggestions on climate negotiation in the presence of IRS.

Keywords: Increasing returns to scale; The social optimum; The Cournot-Nash equilibrium; IAMs; Climate negotiation (search for similar items in EconPapers)
JEL-codes: D62 D71 F53 Q54 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:83:y:2019:i:c:p:208-216

DOI: 10.1016/j.eneco.2019.06.011

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