Cooperation and Free Riding in EU Environmental Agreements

Article excerpt

JEL Q58

Over the last few years, the European Union (EU) has implemented the Climate and Energy Package to become a highly efficient, low carbon economy by 2020. Costs to reach the Energy Package's targets vary among EU countries, given both heterogeneity. among countries and different instruments used by governments.

In our research we study costs that potentially may arise when some EU countries do not participate in the Climate and Energy Package with reference to renewable energy sources' (RES) target in order to reduce polluting emissions. We take into account RES production resulting from solar, wind and biomass technologies. Costs are modeled through a functional farm that allows estimation of nonparticipation costs; incomplete participation increases abatement costs for remaining countries by a penalty factor which depends on the convexity of the abatement's marginal cost. Improving the existing literature where the emission reduction rate is equal for all EU countries. (Nordhaus, The Energy journal, 2009) we propose a new model where emission reduction rate differs among countries so that it takes into account differences in technologies across regions. We georeference at the regional level RES' production since each region is characterized by different levels of solar radiation, wind intensity and crop productivity for biomasses which are reflected in different productions' marginal costs. Therefore, the dataset for the considered technologies consists of 97 so-called NUTS 1 regions for a total of 172 observations (NUTS stands. for "Nomenclature of Territorial Units for Statistics"). The NUTS classification come from the Regio-database assembled by Eurostat (1992) which divides each EU counny into different regional levels (Ciccone, European Economic Review, 2002). We apply the levelized cost of energy methodology (Branker et al., Renewable and Sustainable Energy Reviews, 2011) to find marginal costs of the three considered technologies in each EU region. We have listed participants according. to the cumulative share of global CO, emissions from energy consumption. Estimates show that if the old EU 15 member states (corresponding to 82% of EU C[O.sub.2] emissions) are the participating countries and the remaining would free ride, this scenario would cost an additional 31% if the Energy Package responsibility compliance is limited to these member states. …