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

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  • Yang, Zili

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.

Suggested Citation

  • Yang, Zili, 2019. "Increasing returns to scale in energy-intensive sectors and its implications on climate change modeling," Energy Economics, Elsevier, vol. 83(C), pages 208-216.
    • Handle: RePEc:eee:eneeco:v:83:y:2019:i:c:p:208-216
    DOI: 10.1016/j.eneco.2019.06.011
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    Cited by:

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    2. Zhiyuan Gao & Lianqing Li & Yu Hao, 2024. "Financial risk under the shock of global warming: Evidence from China," Business Strategy and the Environment, Wiley Blackwell, vol. 33(2), pages 335-351, February.

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    More about this item

    Keywords

    Increasing returns to scale; The social optimum; The Cournot-Nash equilibrium; IAMs; Climate negotiation;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations
    • F53 - International Economics - - International Relations, National Security, and International Political Economy - - - International Agreements and Observance; International Organizations
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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