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Essays on Technology Transfer, Energy Investment under Uncertainty, and Pro-Social Behavior.

Schüller, David

Environmental Policy has become an increasingly important topic over the last decades. Issues such as acid rain, ozone depletion and most recently climate change required global regulation in order to avoid serious damages to the environment. Whereas the acid rain and ozone depletion issues have been successfully dealt with Barrett (2003), the global community has not been able to address climate change on a global scale. The European Union has been spearheading global climate change efforts by implementing an Emissions Trading System for CO_2 emissions for most of its industrial and energy producers, but due to lacking global support efforts have been reduced. One important issue is how to integrate developing countries which do not have an emission limiting system in place with developed countries that do. A mechanism that has been set up to deal with this issue is the Clean Development Mechanism (CDM). Developed country companies can invest into projects operating in developing countries, and receive emission permits in their home market for the emission reduction their involvement brings about. This mechanism was supposed to increase abatement activity in developing countries, as well as decrease the cost of complying with permit markets in developed countries. Chapter 2 of this thesis, "Technology Transfer Mechanisms and International Cooperation to Combat Climate Change", evaluates the effectiveness of the CDM and proposes an alternative mechanism to address a range of issues for which it has been criticized. Specifically, a new technology transfer mechanism is proposed, labeled Green Technology Banks, as part of a climate change agreement that includes emission limits for developed and developing countries. The mechanism is evaluated according to the following five criteria, standard in the literature that analyses technology-oriented agreements: environmental effectiveness, technological effectiveness, economic efficiency, incentives for participation and administrative feasibility. Under the assumption that several permit markets exist that are imperfectly linked, it is shown that the mechanism performs well according to the specified criteria, while the largest obstacle remains the acceptance of emission limits by developing countries. However, ancillary benefits, access to advanced technology and increased government revenue from emission trading represent a sizable compensation package. Developed countries would have to shoulder most of the cost, but considering the recent efforts to establish the Green Climate Fund as part of a new international climate change architecture, the willingness to pay for such efforts seems to be on the rise. Another important issue concerning the CDM is its effect on investment into renewable energy in developed countries. Theoretically, it reduces the incentive to invest into renewable energy sources since it allows the usage of cheaper permits (Blanco, 2008). This effect has not been studied quantitatively in an uncertain investment environment. Permit prices on the European emissions market are highly influenced by political process and have seen large drops and rises since its inception. Furthermore, energy investment is considered as irreversible. A methodology that is well suited to address such an issue is real-options theory. In Chapter 3 of this thesis, "The Clean-Development Mechanism, Stochastic Permit Prices and Energy Investments", the impact on energy investments stemming from different emission permit classes is analyzed. Permits that are allocated inside the European Emission Trading Scheme and secondary Certified Emission Reductions permits (sCER) originating from the Clean Development Mechanism are considered. One price taking firm which is subject to emission regulation has the choice to invest into a gas or a wind power plant. The firm faces uncertainty regarding stochastically evolving permits prices, while it receives a premium on the electricity price for wind energy. As a first step, the value of the option to invest into a gas power plant over time is determined. Then, the investment probability of a gas power investment in a range of policy scenarios is calculated. Allowing the usage of sCER permits in the present policy framework has a positive impact on gas power investment. Decoupling the price processes has a similar effect. If the quota of sCER permits is doubled, the decrease in the investment probability for wind power is large. Finally, we ran sensitivity tests for different parameter values. We find that investment behavior changes significantly with differing interest rates, the wind energy premium and volatility rate. Lobbying activity from companies, NGOs, fossil energy and renewable energy producers have increased since the aforementioned environmental issues became a political priority. In Europe large lobbying organizations such as EUR-ELECTRIC representing large energy producers with high CO2 levels, or the European Wind Energy Association with over 700 members from 60 countries have been formed. Whereas the latter organization is interested in achieving a more generous support mechanism for its members, such as feed-in tariffs, the former is more interested in reducing the burden environmental policy puts on its members. One example of reducing the burden is trying to increase the overall cap of the Emission Trading System, thereby lowering the price per permit. Considering the impact of lobbying from a real-options perspective in an uncertain environment with respect to permit prices has not been analyzed in the literature so far. Chapter 4,"The Influence of Permit Price Uncertainty and Lobbying on Energy Investments", addresses the issue of how an investor chooses when facing the choice to replace a pre-determined generation capacity by investing into wind or gas power. If he chooses gas power, he has to obtain emission permits. The permit price develops according to a geometric Brownian Motion. Furthermore, the investor can fund lobbying efforts, rendering gas or wind power more profitable. We find that current permit prices are insufficient to induce renewable investment and wind power lobbying must be very effective in order to induce investment in this power type. Gas power lobbying is largely too costly due to the low permit price. In a United States-like situation with no permit market, no effective renewable support scheme, and very strong gas lobbying efforts, close to no renewable capacity will be installed. Depending on the scenario, the social cost of subsidizing wind energy can be large. Whereas the previous chapters addressed the issues of technology transfer and energy investment under uncertainty, chapters 5 and 6 of this thesis consider pro-social behavior in the setting of the TV-Show “Come Dine with Me” from a theoretical and empirical point of view. In the show, five contestants prepare a dinner for each other during the course of a week and evaluate each other’s performance. The winner receives a monetary prize. Evaluations remain concealed until the show is broadcast. Because actual voting behavior remains concealed during the show, a contestant could evaluate his/her opponents with zero in an effort to increase his own chances of winning without risking later punishment in the form of low scores. However, when looking at the actual data from the show, such behavior is virtually never observed. One potential explanation for this observation is that interaction between human beings is, to a large extent, governed by social norms that have evolved over time and have been instilled in us since childhood. In the absence of compliance to social norms, everyday interaction would be difficult because every situation would require the persons involved to establish acceptable behavior anew or to coordinate regarding some mutually acceptable behavior. Compliance with a social norm can be enforced through so-called moralistic punishment. Moralistic punishment is defined as: “… the enforcement of social norms by outraged but otherwise not directly affected third parties” (Carpenter2012), p. 555). Another important dimension that leads people to adhere to norms is the potential loss of reputation in the eyes of their peers, often termed social approval (Benabou, 2003; Benabou, 2006; Bernheim, 1994; Hollaender, 1990}. In his seminal article, Bernheim (1994) postulates: “When popularity is sufficiently important relative to intrinsic utility (defined as utility directly derived from consumption), many individuals conform to a single, homogenous standard of behavior, despite heterogeneous underlying preferences” (p. 844). Bernheim’s model also allows for deviations from a norm for agents with extreme preferences. This explains the need for third party punishment, because in certain situations the intrinsic utility gain may lead to deviations from the norm. Considering these potential factors of influence on voting behavior of participants in the TV-Show, we investigate whether they can help to explain why participants do not seem to evaluate each other with a zero. In chapter 5, "Come Dine with Me: a Game-Theoretic Analysis", we interpret popular the TV-show as a simultaneous non-cooperative game with evaluation levels as strategic variables, and show that it belongs to a class of strategic games which we call mutual evaluations games. Any mutual evaluation game} (MEG) possesses a zero equilibrium---i.e. a Nash equilibrium where all players evaluate each other with the lowest available scores---as well as numerous non-zero equilibria. Since the zero equilibrium is an equilibrium in weakly dominant strategies, it may arguably be regarded as the canonical equilibrium. Yet, in 212 rounds of the German format of never achieved this equilibrium, nor did they (with one exception) play any other equilibrium. We provide potential explanations for this behaviour by considering the impact of social pressure and reputation mechanisms, bandwagon effects, inequality aversion and sequential voting effects. Finally, chapter 6,"Pro-Social behavior in the TV format Come Dine with Me: An empirical investigation", considers the influence of social approval and reputation on voting behavior in the German version of the TV format from an empirical point of view. We test whether reputation, social in-game influences, objective quality, or personal traits impact the voting behavior of participants, with a dataset running from 2006 to 2011. We find that the objective sophistication of a meal, the order of cooking, whether a person has already cooked, and the social similarity between contestant and evaluator all have a significant influence on the evaluating behavior. These findings help to improve the understanding of the impact that reputation and social approval have on economic decision making.

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Schüller, David: Essays on Technology Transfer, Energy Investment under Uncertainty, and Pro-Social Behavior.. 2014.

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