Essays on Environmental and Development Economics

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1 Essays on Environmental and Development Eonomis Publi Poliy, Resoure Pries and Global Warming Linda Sahlén Umeå 2008

3 Abstrat This thesis onsists of four self-ontained papers, whih are all related to important environmental and natural resoure issues from a developing ountry perspetive. Paper [I] onerns limate poliy and addresses the potential welfare gains of introduing a tehnology transfer from the North (riher ountries) to the South (poorer ountries). The results largely depend on the environmental poliy in the pre- transfer resoure alloation and, in partiular, whether or not the South abates its own emissions. Although the tehnology transfer is desirable from a global soial planners point of view, it is shown that the inentives to use the transfer might be weak from the perspetive of the North; at least if the South takes its own measures to redue emissions. However, in a situation where the North is ommitted to emission redutions aording to the Kyoto protool, it is shown that there will learly be inentives for the North to use the tehnology transfer in order to reah the Kyoto targets in a more ost effiient way. In paper [II], the likely effets of an environmental fisal reform in Namibia are examined by means of a Computable General Equilibrium (CGE) model. The results show that the introdution of an environmental fisal reform, where taxes on natural and environmental resoures (fish rents, energy and water) are reyled to the eonomy in different ways might give rise to benefits in terms of GDP, employment and inome distribution, in addition to the environmental impats. While subsidizing unskilled labour would give the most favourable outome in terms of real GDP and employment impats, a derease in food taxes might be a more interesting option if GDP, employment, inome distribution and environmental impats are onsidered in ombination. In paper [III], the value of irrigation water used for different rop alternatives in the Hardap region in Southern Namibia is estimated. The study finds that all rop alternatives that farmers in the region urrently hoose among, will remain finanially viable after the planned inreases in user harges. However, if full ost reovery is to be ahieved in the future, substantial hanges in the agriultural prodution will most likely be neessary. The method is also extended in order to study the potential effets on total water demand if further inreases in user harges are implemented. Paper [IV] studies the likely effets of exogenous international food and oil prie shoks on the Namibian eonomy. This is partiularly interesting in a ountry where the domesti onsumption of orn and petroleum produts is mainly imported, and where water sarity represents one of the main onstraints to agriultural expansion. The results show that the Namibian eonomy will be negatively affeted from the food and oil prie inreases, and water sarity will further limit the ability of the eonomy to adapt to international oil and food prie inreases. Keywords: Climate poliy, tehnology transfer, omputable general equilibrium model, environmental fisal reform, revenue reyling, water sarity, resoure pries

5 Aknowledgements I will always remember my time as a PhD student at the Department of Eonomis in Umeå. Never before in my life have I experiened so muh ups and downs and I ould not have imagined to what extent work would suddenly beome to affet my daily mood! However, when I m looking bak at it now, it atually makes me feel quite good, so I guess it was worth it! There are a few people to whom I am espeially grateful for guiding me through these years. First of all, my main supervisor Thomas Aronsson, thank you for patiently letting me ome up with my own ideas and for enouraging me to put them (at least some of them ) into pratise. I appreiate the way in whih you always made me feel welome to knok on your door and also your enouraging words when I sometimes felt ompletely lost in the swamp of modelling! I really admire your great knowledge and your amazing researh-enthusiasm; you have provided me with invaluable insights about eonomi theory. My o-supervisor Kenneth Baklund, thank you for teahing me all about GAMS and for your pedagogi way of giving me many intuitive insights, espeially during the time of writing our o-authored paper. Thank you also for all our interesting onversations about everything from limate poliy and teahing matters to interior design! I would also like to thank Jesper Stage for onvining me to do a PhD in the first plae. Although I have had many doubts about whether it was a good idea or not, today I am glad I listened to your advie! Thank you for your support and enouragement, and also for being a good soure of inspiration onerning researh topis during the years. Thanks for good guidane when writing our o-authored paper and for valuable omments and suggestions on earlier versions of two other papers in this thesis. Thanks also to Annika Nilsson, for good ooperation and memorable adventures in Namibia and South Afria when gathering data for our o-authored paper. I am also grateful to Karl-Gustaf Löfgren and Magnus Wikström, who served as seminar disussants on an earlier version of one of the papers, and also to Thomas Sjögren for insightful omments on a former version of another paper in the thesis. Your omments and suggestions really helped to improve the papers. A speial thanks also to the International Institute for Environment and Development (IIED) in London, in partiular James MGregor and Hannah Reid, for giving me the opportunity to extend my knowledge

6 about Namibia by involving me in a very interesting projet. IIED provided an inspiring working environment and I learned a lot through our ooperation! There are many people who have ontributed in making the department a nie working environment, as well as a soial plae. I would like to thank you all! Speial thanks to Eva and Marie, I an not imagine what the department would be like without you! Thank you for all your help regarding teahing and administrative matters, and for sharing many good laughs in the offee room during the years. A speial thanks also to Olle for making sure my yoghurt was never left after best-before-date in the fridge! I would also like to thank my PhD student olleagues, for making life as a PhD student so muh more enjoyable! Lena, thanks for sharing my interest in so many good things in life, not at least travelling and good food! Thanks for memorable adventures in Hawaii and London, and for your professional guiding in San Diego and Los Angeles. I really appreiate your helpful manners and the way in whih you have brought life to the department with your amazing energy. Johanna, thanks for lots of fun, inluding vinlotteriet and onsdagsfikat, whih never seemed to survive after our first enthusiasm faded out I ould not have had a better roommate during the first years at the department and I have missed you sine you left! Camilla, thanks for regularly taking me to both fysträning and beah volleyball at IKSU it was great fun and I miss it a lot! Thanks Catia, for bringing a bit of Italian spirit and temper to the department, Ulf for always lightening up the day with a good mood and refreshing ideas and Lars for giving me astonishing insights in the world of hunting (for example that a ståndskall på älg is the most magial moment a hunter an ever think of!). Thanks Magda for persuading me not to throw away the golf gear, at least not yet, Albina for even appreiating long and good nights sleep more than I do (!) and Andrea for exellent information about whih skies are best for pist and off pist skiing! To all of you others who have been around during these years, thanks for many memorable times and for great support when life as a PhD student sometimes felt quite hard! I am also grateful that I have had really good friends outside of the department during these years. In times when small problems at work (like some bug in the omputer programming ode) felt like the end of the world your ompany really helped to put things into perspetive! Thank you Kramforstjejerna ; Katrin, Ullis, Nettan, Maria E, Cammo and Jeffan for giving me so muh fun to look forward to during these years. Our visits to Dublin, London and

7 Tusany as well as Christmas and birthday parties have meant a lot to me and I always enjoy your ompany! Carin and Anna, I am glad that leaving Umeå means I will get loser to both of you. Carin, you have already made sure I feel really at home in Sumpan, thanks! Maria Stenvall, you are a true good old friend. I have very muh appreiated our film evenings and all our inspiring onversations about life! Stina, thanks for all the times when your thrilling smile have lightened up my day! Annika, Desirée and Evelin, I am glad to have met you and thanks for muh fun. I would also like to thank the group of moleular biologists, övikstjejer and others who have beome great friends during the years in Umeå. Thank you for the best new years trips to fjällen and for all nie birthday and dissertation parties (inluding great gourmet dinners). I am really happy to have had the hane to get to know you all! Thank you Mum, Dad and my dear sisters with families for always being there! Marlene, you have been a great ompanion during the years; thanks for sharing everything from my shool homeworks when we were kids, wardrobe (whether you liked it or not!) when we were teenagers to student flat in Umeå for a while! Thank you for always taking good are of matters - and your sisters! Åsa, I really respet your strength I am looking up to you in so many ways! Petra, it is impossible to get bored in your ompany; I admire your joy of living and your very wise teenage views about life! At last, I would like to thank the love of my life, Johan, for putting up with my shifting temper during these years. Thank you for your sinere love and for always believing in me. Life with you is an amazing adventure, and I love the way it feels like it has only just begun! Stokholm, Deember 2008 Linda

9 This thesis onsists of a summary and the following four self-ontained papers: [I] Aronsson, T., Baklund, K. and Sahlén, L. (2006) Tehnology Transfers and the Clean Development Mehanism in a North-South General Equilibrium Model. Umeå Eonomi Studies No. 697 (revised). [II] Sahlén, L. (2008) Environmental Fisal Reform in Namibia A Potential Approah to Redue Poverty? Umeå Eonomi Studies No. 757 (revised). [III] Nilsson. A., Sahlén, L. and Stage, J. (2003) A Net Bak Valuation of Irrigation Water in the Hardap Region in Namibia. Agrekon 42, 3: [IV] Sahlén, L. (2008) The Impats of Food- and Oil Prie Shoks on the Namibian Eonomy: The Role of Water Sarity. Umeå Eonomi Studies No. 758.

11 Summary 1 1. Introdution This thesis onsists of four self-ontained papers, whih are all related to important environmental and natural resoure issues from a developing ountry perspetive. The topi of the first paper is Climate Change. One of the most ontroversial issues in the debate over global limate hange is the apparent divide between the interests and obligations of developed and developing ountries. The priniple of equity whih represents the view that industrialised ountries should at first sine they are the soure of most past and urrent emissions - is embedded in the United Nations Framework Convention on Climate Change (UNFCCC) and in the Kyoto Protool, whih sets binding targets for industrialised ountries only. This raises onern, however, about the ost effiieny of these emission redutions, and among a number of possible means for inreasing ost effiieny, tehnology transfers have beome one of the ore issues of the UNFCCC. In the first paper in this thesis, the potential global welfare gains of introduing a tehnology transfer from riher to poorer ountries in order to mitigate greenhouse gas emissions is examined using a general equilibrium model of the global eonomy. In developing ountries, where inome levels and per apita CO 2 -emissions are, in general, far below those of industrialised ountries, other environmental onerns than CO 2 -emissions are often on top of the poliy agenda. In Namibia, a ountry that is highly dependent on natural resoures (for example fishing and agriulture) and has one of the most unequal inome distributions in the world, the government is searhing for poliies that an ensure a sound and sustainable management of resoures, while at the same time ontributing to a less skewed inome distribution. In the seond paper, the likely impats of introduing an environmental fisal reform are studied by means of a omputable general equilibrium model of the Namibian eonomy. An interesting feature of this analysis is that the environmental fisal reform studied does not only inlude CO 2 -taxation, but also taxation on the resoure rents generated in the fishing setor as well as the removal of the urrent water subsidies. Water is often onsidered to be one of the most important onstraints to development in many developing ountries. Market pries of water do not in general reflet the soial opportunity ost of using water, and in many developing ountries, water subsidies are often relatively widespread, espeially within the agriultural setors. In order to ensure a sound management

12 Summary 2 of sare water resoures, the value of water needs to be reognised, and for that reason, eonomi valuation has ome to play an inreasingly important role in publi deisions of different water poliies. Paper three in this thesis is an estimation of the value of irrigation water in a southern ommerial agriultural region in Namibia. Water resoures and agriulture is in fous also for the forth paper in this thesis. Water sarity might be a signifiant onstraint for the ability of the eonomy to adapt to exogenous shoks. A reent example of suh external shoks is the rising world market pries of food and oil, whih have raised onerns about how developing ountries will be affeted. As a dry orn- and oil-importing ountry, Namibia is among the group of ountries onsidered likely to be most negatively affeted from these prie inreases. In paper four, the likely eonomywide impats of the reently observed inreases in international food and oil pries on the Namibian eonomy are analysed with speial fous on the importane of water sarity for the ability for agriultural prodution to adapt to the hanges. The remaining part of the introdution will be strutured so that for eah one of the above mentioned topis, a more thorough introdution is first given, followed by a summary of the paper assoiated with that speifi topi. 2. The role of Tehnology Transfers in International Climate Poliy Due to the global nature of the problem of greenhouse gas emissions, there is today wide onsensus that in order to address the problem of limate hange, international oordination is required. The first step towards organised international ooperation in this area was taken through the establishment of the international treaty United Nations Framework Convention on Climate Change (UNFCCC), whih first entered into fore in In 1997, an addition to this treaty was signed by a number of nations at the Kyoto Conferene. In the Kyoto protool legally binding emission targets were developed, and the protool is in that sense more powerful than the former treaty. The Kyoto protool sets binding targets for the industrialised ountries (whih in the protool are labelled Annex I ountries), while developing ountries (labelled non-annex I ountries) are exempted from suh targets. This fat raises the relevant question of how ost-effiieny an be ensured when only some ountries are faed with emission targets. One way to ahieve a more ost-effiient abatement is to introdue tehnology transfers between the regions (see e.g. Forsyth, 1999 and Grubb, 2000), and the

13 Summary 3 disussion of tehnology transfer has reeived muh attention in the reent UNFCCC onferenes. Among the ountries that have ratified the UN Climate Change Convention, the developed ountries ommit themselves to promote, failitate and finane, as appropriate, the transfer of, or aess to, environmentally sound tehnologies and know-how to other parties, partiularly to developing ountries, to enable them to implement the provisions of the Convention (see Artile 4.5 of the UN Climate Convention). In reent years, there has also been an inreased reognition that projets inluding tehnology transfers often provide additional benefits in terms of job reation, mitigation of other emissions than greenhouse gases as well as health benefits (UNFCCC 2007). In the Kyoto protool, the idea of tehnology transfer is formalised via the Clean Development Mehanism, whih allows Annex I ountries to invest in projets aiming at reduing emissions in non-annex I ountries, and also to offset the emission redutions ahieved by those projets against their own emission targets. In this respet, the CDM might provide an important tool by reating inentives for tehnologies to be transferred between riher and poorer ountries. Several studies show that an important part of total CDM projets atually involves tehnology transfers from Annex I to non Annex I ountries (see e.g. Haites et al., 2006, Youngman et al., 2007 and Conink et al., 2008). However, it is important to note that the purpose of this projet based flexibility mehanism is also to ontribute to development in the hosting ountry. There are a number of previous studies modelling CDM, and other flexible mehanisms, in a way similar to emissions trading (see e.g. Ellerman et al., 1998, Zhang, 2001 and Anger et al., 2007), i.e. fousing only on the ost-effiieny effet from using suh mehanisms while ignoring potential non-arbon welfare effets assoiated with this. It has been shown that some of the additional benefits from atual CDM projets are, for instane, improved air and water quality and inreased employment (see e.g. Austin and Faith, 1999 and Banuri and Gupta, 2000). In paper I, the potential welfare effets from introduing a tehnology transfer between the North (Annex I) and the South (non-annex I) are analysed. Speial fous is given to how the pre-transfer resoure alloation affets the inentives to use the transfer. The effets of unilateral tehnology transfers from the North to the South in a general equilibrium model framework were first addressed by Yang (1999). However, Yang s analysis does not take into aount the effet of adding the Kyoto emission redution targets as a onstraint on the North and, therefore, does not apture the potential additional inentives for using a tehnology transfer through the implementation of CDM projets within the Kyoto protool. Another

14 Summary 4 important ontribution of our paper is that, by dividing the Southern eonomy in a formal and informal eonomi setor, we are also able to inorporate the effets of labour mobility between the two setors into the analysis. This effet an be seen as one important additional benefit for the host ountry arising from the tehnology transfer. Another distintion from Yang s analysis is that in our study, the abatement ost differential depends on the level of domesti abatement already implemented in the South before the introdution of the tehnology transfer. This is a reasonable assumption as there is probably less low-ost options available for tehnology transfer the more abatement efforts the South already has implemented on their own. Summary of Paper [I] In this paper, the likely welfare effets from introduing a tehnology transfer from the industrialised ountries (North) to the developing ountries (South) in order to mitigate greenhouse gas emissions are studied. This is analysed in a stylised numerial general equilibrium model, where the world-eonomy is divided into two regions, North (Annex I in the Kyoto protool) and South (non-annex I). The southern eonomy is divided into a formal and an informal setor. This is motivated by the fat that in developing ountries, the informal setor generally has a more important role than in most developed ountries (see e.g. Ihrig and Moe, 2000). The southern formal setor is assumed to be less labour intensive and is also haraterized by a higher average produtivity ompared to the informal setor. The tehnology transfer, as modelled in our paper, gives rise to a movement of labour from the informal to the formal setor, resulting in a positive welfare effet in addition to the emission redutions ahieved through the implementation of the new abatement tehnology. We onsider four different regimes with respet to the pre-transfer resoure alloation; (i) the regions are desribed as unontrolled market eonomies, meaning that no poliy measures are undertaken in order to ombat emissions; (ii) the regions are imperfetly ontrolled market eonomies, meaning that the unontrolled market eonomy is extended to represent a situation where the emission ontrol targets aording to the Kyoto protool are implemented; (iii) the resoure alloation is a ooperative equilibrium, here desribed as a onditional first best resoure alloation implemented by a global soial planner; (iv) the resoure alloation is the outome of a nonooperative Nash game, implying that eah region only ats in order to maximize their own residents utility while taking the ations of the other region as given. The first and fourth senarios represent two extreme views on how the regions behave if they

15 Summary 5 do not ooperate. Although the third senario might seem unrealisti from a urrent pratial poliy perspetive, it provides an interesting omparison as the result from this ooperative senario is a first best outome. The study finds that by introduing a tehnology transfer, total emissions an be redued and global welfare improved. If the regions do not ooperate, although global welfare will improve, there appears to be little inentives for the North to introdue the tehnology transfer, at least if the South is assumed to take own measures to redue emissions. However, if it is assumed that the South does not abate its own emissions prior to the introdution of the tehnology transfer, the North will benefit from using the transfer. This implies that if there is onern from the industrialised ountries that developing ountries are not taking any/enough measures to derease their emissions, it may be in the industrialised ountries interest to transfer environmental tehnology to ahieve abatement in a more ost-effiient way. If, hypothetially, there was a global soial planner to deide on the optimal poliy, both the North and the South would abate their own emissions, and a transfer from the North to the South would also be used. An interesting result is the finding of what role the introdution of the tehnology transfer (as a CDM projet) might play when the North is subjet to the emission onstraint in the Kyoto protool. In this ase, the inentives for North to use the tehnology transfer inrease ompared to the Nash equilibrium, and the tehnology transfer will be used independently of whether South abate emissions by themselves or not. For the South, it is shown that the tehnology transfer will lead to inreased welfare, partly beause of a realloation of labour from the informal less produtive, setor to the formal more produtive setor. 3. Environmental Fisal Reforms in Developing Countries In reent years there has been an intensified debate about the linkages between poverty and the environment, and one result from this disussion is an inreased interest in environmental fisal reforms in developing ountry literature. The idea is that if environmental taxes ould improve environmental quality without negatively affeting the poorest people, the additional environmental tax revenues ould, in turn, be used in order to derease poverty (World Bank 2005). The design of environmental fisal reforms in developing ountries might differ somewhat from the traditional environmental tax reforms whih so far mainly have been

16 Summary 6 implemented and studied in the US and Europe. While the environmental tax reforms in US and Europe fous mainly on energy taxation (see e.g. Goulder, 1995, Bovenberg and Van der Ploeg, 1998 and Bovenberg 1999), in natural resoure rih developing ountries, taxes on natural resoure use and the removal of environmentally harmful subsidies an also be of great interest (Bosquet, 2000). Further, in some reent studies of environmental fisal reforms in developing ountries, it is lear that the fous on potential additional benefits is partly shifted from the traditional GDP and employment effets into impats on poverty and inome distribution (see e.g. Van Heerden et al., 2006a and b and O Ryan, 2005). The reason is that in poor ountries, poverty might not only be related to unemployment; it is often more widespread and might also depend on the pries of ommodities that make up a signifiant share of household s onsumption expenditures. Even though the taxation of natural resoure rents are often pointed out as an interesting part of environmental fisal reforms in developing ountries, there are few studies fousing on pure rent taxation. One reason is of ourse, the fat that there are usually no available estimates of atual resoure rents in developing ountries. In the light of this, Namibia provides an interesting exeption due to it s relatively well developed system of Natural Resoure Aounting. In paper II, the potential impats, primarily in terms of GDP, employment and inome distribution, of an environmental fisal reform inluding partly rent taxation, are studied by using a omputable general equilibrium model of the Namibian eonomy. Summary of Paper [II] As Namibia is a ountry highly dependent on its natural resoure base (mining, fishing, agriulture and wildlife based tourism) and has one of the world s most unequal inome distributions (the gini-oeffiient is 0.7), the government is struggling to set up poliies whih an ontribute to a more sustainable management and a redued poverty and inequality. The purpose of this study is to analyse the likely impats of an environmental fisal reform, where taxes on environmental resoures are reyled to the eonomy in order to give rise to other benefits, in addition to the environmental impats. These additional benefits ould be, for example, inreased GDP, inreased employment and a less skewed inome distribution. This is studied by means of a Computable General Equilibrium (CGE) model of the Namibian eonomy. In order to fit the purpose of this analysis, the main database on whih the model is based is, to some extent, extended to inlude also environmental data and natural resoure

17 Summary 7 aounts. The environmental fisal revenues onsist of inreased taxation of fish rents and energy together with a removal of the present water subsidies. The eonomy wide effets are analysed for five different revenue-neutral senarios, whih differ aording to the way the environmental fisal revenues are reyled; a) a general derease in the ommodity sales tax b) a derease in the ommodity sales tax on food only ) subsidization of unskilled labour d) an inrease of diret governmental transfers to all households and e) an inrease of diret governmental transfers to poor households only. One interesting result from this analysis is that environmental taxes might not neessarily be regressive in nature. The inreased taxes on fish rents and energy, together with the dereased subsidies of water will mainly affet the riher households. Although all reyling options reinfore the redistribution of inome from rih to poor households, the degree of the redistribution differs between reyling options, and in terms of ombined environmental, GDP, employment and inome distribution effets, the hoie of reyling turns out to be important. While subsidizing unskilled labour gives the largest effets in terms of GDP and employment, when it omes to reduing CO 2 -emissions as well as lowering the gap between rih and poor households this is not neessarily the first hoie. It turns out that a derease in the taxes on food might be a more interesting option if all target variables are to be onsidered in ombination. In general, the results from this study provide further evidene for the idea that in poor ountries, poverty is not only a question of employment, but also of the pries of the ommodities that make up a signifiant part of poor households expenditures. Although the employment effet is about the same whether the overall ommodity taxes or taxes on food only are redued, the food tax ut performs signifiantly better in terms of targeting the poor households. 4. Estimating the Value of Water In many developing ountries, water is onsidered to be one of the most important onstraints for development. Despite this, water is often treated as an open-aess resoure with no indiation of the atual value of the resoure. In situations where water tariffs exist, these do not, in general, reflet the ost of providing water, and espeially within agriulture, water is often subsidized. In many developing ountries, agriultural ativities use about 70 perent of

18 Summary 8 the national total water onsumption, and irrigated rop prodution is in most ases the most water intensive ativity. As the ompetition for water resoures is likely to intensify in the future, it is inreasingly important to promote an effiient use of the resoure. In order to ahieve an effiient management of the water resoure, the value of water needs to be reognised, and among eonomists, there are a number of ommonly used methods for estimating the value of water. These inlude for example the hedoni prie method, the ontingent valuation method, the prodution funtion approah and the residual method (see Young, 2005 for a omprehensive desription of different water valuation tehniques). Sine irrigated agriulture onstitutes a major user of water, there are several examples of studies where the value of irrigation water in speifi regions is estimated. For ase studies using the hedoni prie method to estimate the value of irrigation water, see e.g. Faux and Perry (1999) for a study in Oregon, USA and Latinopoulos et al. (2004) for a study applied to one of the regions in Greee. A study by Chowdhurry (2005) on the other hand, provides an example of a prodution funtion approah to estimate the value of irrigation water in Bangladesh, and in Speelman et al. (2008) a residual value approah is used for estimating the value of irrigation water in a provine in South Afria. In the third paper of this thesis, a variant of the residual method is used to estimate the value of irrigation water used in a speifi region in Namibia. The residual imputation method is one of the most frequently used methods for estimating the value of irrigation water, and one explanation for its popularity, espeially onerning valuation studies in developing ountries, is that it is less data-intensive ompared to, for example, the hedoni prie method and the prodution funtion approah. The residual method measures the value of a speifi nonpried input by subtrating all other osts of prodution from the total value of output. The remaining, or residual, value after all other osts are subtrated, is assigned to the non pried input of interest (Young, 1996). To derive the residual funtion, two onditions have to be fulfilled. The first requirement is that pries of the inputs are equated to returns at the margin, implying that the produer is assumed to add inputs to the prodution proess until the value of marginal inputs is equal to the opportunity ost of inputs, i.e. the produer is profit maximizing. The seond requirement is that the total value of prodution an be divided into shares so that eah fator, exept the non-pried one, is paid aording to its marginal produtivity. This implies that the total value of the prodution is ompletely exhausted, and this presumes that a situation with onstant returns to sale is at hand (Debertin, 1986).

19 Summary 9 The Net-Bak method used in this paper an be seen as a variant of the residual approah, whih relaxes some of the restritive assumptions of the residual imputation method. As there are reasons to believe that the markets for human and physial apital in many developing ountries are not ompletely ompetitive and that farmers not neessarily needs to be profit maximizing, the estimated residual value is interpreted as the maximum ability to pay, rather than the marginal willingness to pay. (see e.g. Bate and Dubourg, 1996 and Tren, 1997). Summary of Paper [III] In Namibia, water use has been inreasing rapidly over the past deades, and there is onern that the water supply resoures might be running short of demand. Therefore, water management is one important omponent of Namibia s development strategy, and a sustainable management of water resoures will require an understanding of the full soial value of water. Agriulture, and espeially irrigated rop prodution, is the single most water intensive ativity in Namibia, implying that the value of irrigation water is of partiular interest. In addition, water used for irrigated rop prodution has traditionally been subjet to onsiderable governmental subsidies, and when the government now attempts to phase out these subsidies, the likely impats on agriultural prodution as well as soiety as a whole, will largely depend on the atual value of irrigation water. In this paper, the net bak tehnique is applied in order to estimate the value of irrigation water used in the Hardap region in southern Namibia. This method an be used in situations where lak of data prevents a detailed model of onstraints that affet the farmers deisions. The value (maximum ability to pay) for irrigation water is alulated for different rop alternatives and different irrigation tehniques. These values are then ompared to the urrent tariff for irrigation water and also to the total ost for water supply in order to see what water tariffs farmers would be able to pay, while still remaining profitable. The results show that the planned inrease of water tariffs by the government will most likely not have any effet at all on farming in the Hardap area. All the rops that are urrently grown will remain finanially viable also after the intended inrease of the water tariff. However, if farmers would be faed with the full private ost of supplying water, the most ommon rop alternatives produed (luerne, wheat and maize) would no longer be profitable. This implies that if water user harges are raised to the point where none of the urrent low-value rops remain profitable, the urrent farmers would either hange their prodution into more valuable

20 Summary 10 rops (grapes) or be replaed by other farmers. The problem is that although many farmers are aware of the benefits of hanging their prodution, they are onerned about the high investment osts and high initial losses from growing grapes. The analysis shows that as there is high potential of employment generation in grape prodution, it might be motivated from soiety s point of view that the government were to provide state-guaranteed loans and training for those farmers who wish to start growing grapes. Suh a poliy would redue the total water demand among the farmers. 5. The likely impats of the rising food and oil pries on water sare developing ountries Water sarity might be a signifiant onstraint onerning the ability for an eonomy to adapt to exogenous shoks. One example of suh a shok is the reently observed inreases in the world market pries of food and oil, whih have raised onern about how developing ountries will be affeted, both in terms of overall eonomi ativity and poverty (World Bank, 2008a). Whether ountries will benefit or loose from these rising world market pries depends, to a great extent, on whether they are net-exporters or net-importers of the produts. Aording to studies by the World Bank as well as the International Energy Ageny, Sub- Saharan Afrian ountries are onsidered to be partiularly vulnerable sine they are often net-importers of both orn and oil-produts 1. At the same time, the rising food pries will inrease the profitability within the agriultural setors. However, the expeted positive effet on agriultural prodution from rising food pries alone might be somewhat offset by the simultaneous inrease in fuel pries. The expeted growth of agriultural prodution in developing ountries also raise further onerns about the sustainability of natural resoures, espeially water resoures. The Sub-Saharan Afrian ountries are often dry ountries where the agriultural setor typially onstitutes the major user of water. This implies that water sarity might be another important onstraint for the ability of agriultural prodution to expand its prodution following inreased food pries (Von Braun, 2008). On the household level, the rising food-and oil pries might have different effets for low and high inome households. While inreased fuel pries to a greater extent will affet the riher households, the inreased food pries will most likely do more harm to the poor households sine these households spend a larger share of their total onsumption on food produts. 1 See World Bank (2008a) and International Energy Ageny (2004).

21 Summary 11 Although most studies onerning poverty impats of rising food pries have shown that the effets on poverty will, in general, be adverse (see e.g. Warr, 2005 and Byerlee et al., 2006), there is need for an expliit analysis of the poverty impats in eah speifi ase sine farm households, whih are often among the poorest groups in low-inome ountries, may experiene a rise of fator inome following the food prie inreases, (see e.g. Hertel, 2004 and Aksoy and Dikmelik, 2008). In paper IV, the likely impats of the reently observed inreases in international food and oil pries on the Namibian eonomy are studied using a CGE-model. Sine Namibia is a dry ountry, the analysis takes the importane of water sarity into aount by expliitly inluding water as a fator of prodution in the model. In addition to the eonomy-wide impats, the analysis provides further examination of the likely poverty impats of these international prie inreases. In previous CGE-based literature, impats of food and oil prie shoks on developing ountries are in general studied separately, and onerning food, the existing analyses often fous on speifi trade liberalisation poliies, and an therefore not provide any general onlusions about how the reently observed inreases in several food produt pries will affet developing ountries (see e.g. Warr, 2005, Essama-Nssah et al., 2007 and Ivanik and Martin, 2008). Therefore, an impat analysis fousing on the reently observed inreases in both food and oil pries simultaneously is highly motivated. In addition, although the potential environmental impats from expanded agriultural prodution are often mentioned in previous studies about food prie hanges, the magnitude of these effets are not in general examined (See e.g. Ravallion, 2004). Therefore, the inlusion of water as a fator of prodution in this CGE-model adds another interesting dimension to the analysis of the ombined prie shoks, and thereby, the paper also ontributes to the relatively sparse literature dealing with supply and demand for water in a general equilibrium framework (see e.g. Berrittella et al., 2007, Diao and Roe, 2003 and Goodman, 2000). Summary of Paper [IV] In this paper, the eonomy-wide impats of the international food and oil prie inreases on the Namibian eonomy are analysed by means of a CGE- model. Speial fous is given to the importane of water sarity for agriultural expansion.

22 Summary 12 Namibia provides a partiularly interesting ountry for this kind of analysis, sine it is a dry ereal- and oil-importing Sub-Saharan ountry, implying that it is among the group of ountries that is most likely to be negatively affeted from the international prie inreases. In this paper, water is expliitly inluded as a fator of prodution in the agriultural setors as well as in a water distribution servie setor, whih in turn distributes water to all other setors in the eonomy. Namibia is one of few developing ountries where water aounts are onstruted following the UN s framework for System of Environmental and Eonomi Aounts (SEEA). These water aounts provide data on water supply and use in Namibia, whih enables the inlusion of water as a fator of prodution, in addition to the original eonomi setor data. The results show that the overall impat from the rising world market pries on food and oil on Namibia s total prodution will be negative; GDP will derease by more or less 1.1 to 1.3 per ent. The main reason is that the inreased exports of mainly agriultural produts an not offset the rise in prodution osts due to more expensive input fators, whih auses a ontration of the eonomy. The overall effet on the struture of the eonomy is a redistribution of prodution from the non-exporting setors (traditional agriulture and servie setors) to the exporting setors (ommerial agriulture, fishing and mining). This is an interesting result as the exporting setors are all natural resoure abundant setors, depending on land, water, fish and mining produts, implying that the Namibian eonomy will most likely be even more dependent on its natural resoures in the future. This will require additional effort on how to ensure a sustainable management of these resoures. The results also show that water sarity, at least to some extent, an beome a onstraining fator for the ability for the eonomy to adapt to these exogenous prie hanges. Aording to the results, agriultural growth will signifiantly depend on the availability of additional water resoures. Conerning the poverty impats of the exogenous prie inreases, the analysis shows that while the oil prie inrease alone will mainly affet the riher households, the ombination of food and oil prie inreases makes the poorer households signifiantly less well off. This result reinfores the general onern that the poor subsistene farmers in developing ountries might not neessarily gain from the food prie inreases.

23 Summary 13 Referenes Aksoy, A.M. and A. Dikmelik (2008) Are Low Food Pries Pro-Poor? Net Food Buyers and Sellers in Low-Inome Countries. World Bank Poliy Researh Paper No Austin, D. and P. Faeth (1999) How muh Sustainable Development an we expet from the Clean Development Mehanism? World Resoures Institute, Washington D.C. Anger, N., C. Bohringer and U. Moslener (2007) Maroeonomi Impats of the CDM: The role of investment barriers and regulations. Climate Poliy 7, 6: Banuri, T. and Gupta, S. (2000). The Clean Development Mehanism and sustainable development: An eonomi analysis. Manila: Asian Development Bank. Bate, R.N. and W.R. Dubourg (1997) A Net-bak analysis of irrigation water demand in East Anglia. Journal of Environmental Management 49: Berittella, M., A.Y. Hoekstra, K. Rehdanz, R. Roson, R.S.J. Tol (2007) The eonomi impat of restrited water supply: A omputable general equilibrium analysis. Water Researh 41: Byerlee, D, T.S. Jayne and R.J. Myers (2006) Managing food prie risks and instability in a liberalizing market environment: Overview and poliy options. Food Poliy 31: Bosquet, B. (2000) Environmental tax reform: Does it work? A survey of the empirial evidene. Eologial Eonomis 34: Bovenberg, L. (1999) Green tax reforms and the double dividend: an updated reader s guide. International Tax and Publi Finane 6: Bovenberg, L. and Van der Ploeg (1998) Consequenes of Environmental Tax Reform for Unemployment and Welfare. Environmental and resoure eonomis 12:

24 Summary 14 Chowdhurry, N. (2005) The Eonomi Value of Water in the Ganges-Brahmaputra-Meghna (GBM) River Basin. Department of Eonomis, Göteborg University. Lientiate Thesis. Conink de, H., F. Haake, N. van der Linden (2007) Tehnology transfer in the Clean Development Mehanism. Climate Poliy 7, 5: Diao, X. and T. Roe (2003) Can a water market avert the double whammy of trade reform and lead to a win-win outome? Journal of Environmental Eonomis and Management 45: Ellerman, A., H. Jaoby and A. Deaux (1998) The Effets on Developing Countries of the Kyoto Protool and CO 2 Emissions Trading. World Bank Poliy Researh Paper No Essama-Nssah, B., D.S. Go, M. Kearney, V. Korman, S. Robinson and K. Thierfelder (2007) Eonomy-wide and Distributional Impats of an Oil Prie Shok on the South Afrian Eonomy. World Bank Poliy Researh Working Paper No Faux, J. and G.M. Perry (1999) Estimating irrigation water value using hedoni prie analysis: A ase study in Malheur County, Oregon. Land Eonomis 75, 3: Forsyth, T. (1999) Flexible Mehanisms of Climate Tehnology Transfer. Journal of Environment and Development 8: Goodman, D.J. (2000) More Reservoirs or Transfers? A Computable General Equilibrium Analysis of Projeted Water Shortages in the Arkansas River Basin. Journal of Agriultural and Resoure Eonomis 25, 2: Goulder, L. (1995) Effets of arbon taxes in an eonomy with prior tax distortions: An intertemporal general equilibrium analysis. Journal of Environmental Eonomis and Management 29: Grubb, M. (2000) Eonomi Dimensions of Tehnologial and Global Responses to the Kyoto Protool. Journal of Eonomi Studies 27:

25 Summary 15 Haites, E., M. Duan and S. Seres (2006) Tehnology Transfer by CDM projets. Climate Poliy 6, 3: Heerden Van, J., R. Gerlagh, J. Blignaut, M. Horridge, S. Hess, R. Mabugu and M. Mabugu (2006a) Searhing for Triple Dividends in South Afria: Fighting CO 2 pollution and poverty while promoting growth. Energy Journal 27, 2: Heerden Van, J., J. Blignaut, M. Mabugu, R. Gerlagh, S. Hess, R.S.J. Tol, M. Horridge, R. Mabugu, M. de Wit and T. Letsoalo (2006b) Redistributing Tax Revenue to Redue Poverty in South Afria: The Cases of Energy and Water. South Afrian Journal of Eonomi and Management Sienes 9, 4: Hertel, T. (2006) A Survey on Findings of the Poverty Impats of Agriultural Trade Liberalization. The Eletroni Journal of Agriultural and Development Eonomis 3, 1: Ihrig, J. and K. Moe (2000) The Dynamis of Informal Employment. International Finane Disussion Paper No 664. Ivani, M. and W. Martin (2008) Impliations of Higher Global Food Pries for Poverty in Low-Inome Countries. World Bank Poliy Researh Paper No Lange, G-M. (2006) Case studies of water valuation in Namibia s ommerial farming. Book hapter in The Eonomis of Water Management in Southern Afria An Environmental Aounting Approah. Cheltenham: Edward Elgar Publishing Ltd. Latinopoulos, P., V. Tziakas and Z. Mallios (2004) Valuation of irrigation water by the Hedoni Prie Method: A ase study in Chalkidiki, Greee. Water, Air and Soil Pollutions: Fous 4: OECD (2005) Environmental Fisal Reform for Poverty Redution. DAC Guidelines and Referene Series, OECD, Paris.

26 Summary 16 O Ryan, R., C. de Miguel, S. Miller and M. Munasinghe (2005) Computable General Equilibrium Model Analysis of Eonomy-wide Cross Effets of Soial and Environmental Poliies in Chile. Eologial Eonomis 54, 4: Ravallion, M. and M. Lokshin (2004) Gainers and Losers from Trade Reform in Moroo. World Bank Poliy Researh Working Paper No Speelman, S., S. Farolfi, S. Perret, L. D haese and M. D haese (2008) Irrigation water value at small-sale shemes: Evidene from the North West Provine, South Afria. International Journal of Water Resoures Development 24, 4: Tren, R. (1997) A net bak analysis of irrigation water demand along the Croodile River South Afria. University Collage London, London, United Kingdom. Master thesis. United Nations Framework Convention on Climate Change (1992) United Nations. United Nations Framework Convention on Climate Change (2007) Innovative options for finaning the development and transfer of tehnologies. United Nations. Von Braun, J., A. Ahmed, K. Asenso-Okyere, S. Fan, A. Gulati, J. Hoddinott, R. Pandya- Lorh, M.W. Rosegrant, M. Ruel, M. Torero, T. van Rhenen and K. von Grebmer (2008) High Food Pries: The What, Who, and How of Proposed Poliy Ations. International Food Poliy Researh Institute (IFPRI). Poliy Brief. Warr, P. (2005) Food Poliy and poverty in Indonesia: A General Equilibrium Analysis. Australian Journal of Agriultural and Resoure Eonomis 49, 4: World Bank (2005) Environmental Fisal Reform What Should Be Done and How to Ahieve it. The World Bank, Washington. World Bank (2008a) Double Jepoardy: Responding to High Food and Fuel Pries. Working paper (prepared for the G8 Hokkaido-Toyako Summit 2008) No

27 Summary 17 World Bank (2008b) Rising food pries: poliy options and World Bank response. Bakground note for the development ommittee, April, Washington. Yang, Z. (1999) Should the North Make Unilateral Tehnology Transfers to the South? North-South Cooperation and Conflits in Responses to Global Climate Change. Resoure and Energy Eonomis 21: Young, R.A. (1996) Measuring eonomi benefits for water investments and poliies. World Bank Tehnial Paper 338. Young, R.A. (2005) Determining the Value of Water: Conepts and Methods. Washington DC: Resoures for the future. Youngman, R., J. Shmidt, J. Lee and H. de Conink (2007) Evaluating tehnology transfer in the Clean Development Mehanism and Joint Implementation. Climate poliy 7: Zhang, Z. (2004) Meeting the Kyoto Targets: The Importane of Developing Country Partiipation. Journal of Poliy Modelling 26, 1: 3-19.

29 I

31 Tehnology Transfers and the Clean Development Mehanism in a North-South General Equilibrium Model * Thomas Aronsson, Kenneth Baklund and Linda Sahlén Department of Eonomis Umeå University SE Umeå, Sweden Abstrat This paper analyses the potential welfare gains of introduing a tehnology transfer from Annex I to non-annex I in order to mitigate greenhouse gas emissions. Our analysis is based on a numerial general equilibrium model for a world eonomy omprising two regions, North (Annex I) and South (non-annex I). In a ooperative equilibrium, a tehnology transfer from the North to the South is learly desirable from the perspetive of a global soial planner, sine the welfare gain for the South outweighs the welfare loss for the North. However, if the regions do not ooperate, then the inentives to introdue the tehnology transfer appear to be relatively weak from the perspetive of the North; at least if we allow for Southern abatement in the pre-transfer Nash equilibrium. Finally, by adding the emission redutions assoiated with the Kyoto agreement, our results show that the tehnology transfer leads to higher welfare in both regions. Keywords: Climate poliy, tehnology transfer, Kyoto protool, general equilibrium, lean development mehanism JEL lassifiation: D58; D62; Q52 * The authors would like to thank Karl-Gustaf Löfgren and Tomas Sjögren for helpful omments and suggestions. A researh grant from FORMAS is also gratefully aknowledged.