Peter Birch Sørensen: Research in Environmental Economics

My primary current research area is environmental economics and the economics of climate change. My recent research topics include issues relating to recycling and the circular economy, optimal unilateral climate policy in an open economy faced with the risk of climate leakage, the functioning and reform of the European Emissions Trading System, the optimal transition from fossil fuels to renewable energy, and the theoretical foundations of “green” national accounting.

I am currently co-directing the following major research projects in Environmental Economics:

A GREEN NET NATIONAL PRODUCT FOR DENMARK

The purpose of this project is to develop a measure of Denmark’s Green Net National Product (GNNP). This will be done by adjusting the Gross Domestic Product (GDP) recorded in the National Accounts for the value of the environmental and ecosystem services consumed by Danish residents over the year and for the change in the value of the stocks of Denmark’s exhaustible and renewable resources, stocks of pollution, and other forms of “natural capital”. These adjustments of the conventional GDP will highlight the importance of environmental goods and services for the welfare of Danish citizens and indicate whether Danish economic growth takes place at the expense of the environment.

The scientific value-added of the project

While there is fairly large theoretical literature on how to construct a GNNP for the purpose of measuring whether economic development is environmentally sustainable, there are only few studies that have tried to estimate empirical time series for the GNNP of particular countries (e.g. Pezzey et al. (2006), Mota et al. (2010). The present project will extend the existing international scientific literature on “Green National Accounting” by 1) Clarifying how the value of a number of important ecosystem services is related to land use and land use change, 2) Clarifying how a “carbon budget” for allowable greenhouse gas emissions affects the evolution of the GNNP, 3) Illustrating how an “environmental trade balance” can be calculated by estimating flows of pollution between Denmark and the rest of the world, and 4) Developing a method for “scaling up” estimates of the value of local environmental goods to a plausible value of the corresponding good at the national level. Compared to previous studies for other countries, the present project will also include a wider range of environmental goods and services in the calculation of the GNNP, drawing on the literature on ecosystem service valuation and land use change (e.g. Bateman et al., 2013). This will bring forward the international research frontier in Green National Accounting.

Organization and partners

The economic research on the estimation of a GNNP for Denmark is carried out by a group of researchers in the Department of Economics and the Department of Food and Resource Economics at the University of Copenhagen in collaboration with Chief Consultant Ole Gravgaard Pedersen from the Green National Accounts section of Statistics Denmark. The project involves cooperation with researchers at the university’s Department of Political Science who are studying the political, institutional and administrative barriers to the use of green national accounting and the GNNP in the evaluation of public policies. An important goal of the GNNP project as well as the GREEN REFORM project is to develop analytical tools and empirical knowledge which are seen by policy makers to be useful in the evaluation of public policy. To secure a fruitful dialogue with potential users of the analytical tools and research findings emanating from the two projects, an Advisory Board including high-level representatives of the following institutions has been set up: The Ministry of Finance, The Ministry of Environment and Food, The Ministry of Energy, Utilities and Climate, Statistics Denmark, The Danish Economic Councils, and the Danish Council on Climate Change. The project has received financial support from the KR Foundation and the Carlsberg Foundation.

Expected outcomes and societal impact

The project represents the first attempt to construct a time series for Denmark’s GNNP. The measure of GNNP aims to account for the most important aspects of pollution and environmental quality in Denmark covered by national policy targets and/or international environmental agreements. The project will thus provide a useful tool for measuring the overall progress towards meeting the environmental policy targets across the different policy areas and evaluating whether Denmark is on a sustainable development path. It will furthermore add to the ongoing activities of mapping and valuing ecosystem services (see Termansen et al., 2015).

References

Bateman, I., Harwood, A, Mace, G.M., Watson, R.T., Abson, D.J., Andrews, B., Binner, A., Crowe, A., Day, B.H., Dugdale, S., Fezzi, C., Foden, J., Hadley, D., Haines-Young, R., Hulme, M., Kontoleon, A., Lovett, A. A.; Munday, P., Pascual, U., Paterson, J., Perino, G., Sen, A., Siriwardena, G., van Soest, D., Termansen, M. 2013. Bringing Ecosystem Services into Economic Decision-Making: Land Use in the United Kingdom. Science, 5, 05.07.2013, p. 45-50.

John C.V. Pezzey, Nick Hanley, Karen Turner, Dugald Tinch (2006). Comparing augmented sustainability measures for Scotland: Is there a mismatch? Ecological Economics 57 (2006) 60– 74.

Rui Pedro Mota, Tiago Domingos, Victor Martins (2010). Analysis of genuine saving and potential green net national income: Portugal, 1990–2005. Ecological Economics 69 (2010) 1934–1942.

Termansen, M., Levin, G., Hasler, B., Jacobsen, J.B., Lundhede, T.H., Thorsen, B.J., 2015. Status for kortlægning af økosystemer, økosystemtjenester og deres værdi i Danmark. Videnskabelig rapport fra DCE – Nationalt center for miljø og energi, 147. 128 pp.  http://dce2.au.dk/pub/SR147.pdf

THE GREEN REFORM MODEL: A Model of the Interaction of the Environment and the Danish Economy

The computable general equilibrium REFORM model of the Danish economy developed by the Danish Institute for Economic Modelling and Forecasting (DREAM) is currently used by the Danish Ministry of Finance and the Danish Economic Councils to evaluate the long-run effects of policies aimed at improving the performance of the Danish economy. The present research project will develop the GREEN REFORM model as a direct extension of the REFORM model. The GREEN REFORM model will be able to simulate the environmental effects of Danish economic activity and the economic effects of policy interventions to meet the targets for Danish environmental, energy and climate policy.

The scientific value-added of the project

The GREEN REFORM model will allow 1) a consistent evaluation of the effects of economic policies on key indicators of environmental quality and 2) an analysis of the effects of alternative environmental and climate policies on the level and composition of economic activity. The goal is to develop a modeling tool which will allow the evaluation of economic and environmental policy within a unified conceptual framework that accounts for environmental as well as economic effects, thereby facilitating an integrated assessment of the two types of policy. Specifically, the GREEN REFORM model will extend the existing REFORM model in the following ways:

Accounting for natural resource use and emissions of pollutants. The extended model will account for the impact of economic activity in all the different sectors of the Danish economy (73 sectors in the current model) on the emissions of 14 different pollutants considered to be important for environmental quality in Denmark and for Denmark’s contribution to cross-border and global pollution. This will require a modeling of endogenous pollution abatement activity and the impact of government regulation on such activity. The model will also allow a detailed mapping of the use of inputs of energy, water and materials in different sectors as well as their generation of various waste products.

A more detailed modeling of key sectors. The GREEN REFORM model will include a more detailed and disaggregated modeling of the following sectors which play a particularly important role in Danish environmental and climate policy: Energy, transport, waste treatment, and agriculture. The modeling of the energy and transport sectors will allow for endogenous choices among different technologies with different environmental impacts, and the modeling of agriculture will introduce land as a separate factor of production as well as a more detailed endogenous product mix to describe how the volume and composition of agricultural output and changes in land use affect greenhouse gas emissions and emissions affecting water quality. The more elaborate modeling of the waste treatment sector will allow an evaluation of the environmental and economic effects of policy measures to increase the degree of recycling of waste and raw materials.

The scientific goal of the project is to set a new and higher international standard for the modeling of the interaction of the economy and the environment. One source of inspiration for the modeling work will be the “green” model of the Dutch economy developed by Gerlagh et al. (2002), but the GREEN REFORM model will be more detailed and will capture more aspects of the economy-environment nexus. It will also build on recent advances in the techniques for modeling pollution abatement technologies that allow a calibration of the model to micro data on the costs of different abatement technologies, exemplified by the contribution of Kuila and Rutherford (2013).

Organization and partners

The work to develop the GREEN REFORM model is directed by professor Peter Birch Sørensen from the Department of Economics at the University of Copenhagen in collaboration with Peter Stephensen, Research Director of the Danish Institute for Economic Modelling and Forecasting (DREAM). The project involves researchers from the Department of Economics of the University of Copenhagen and members of the staff of the DREAM modeling group. Guidance on data availability and data work will be offered by Chief Adviser Ole Gravgård Pedersen who is directing the work in Statistics Denmark to develop Green National Accounts for the Danish economy. The modeling work is carried out under the guidance of an advisory group including representatives from the Ministry of Finance, the Ministry of Environment and Food, Statistics Denmark, the Danish Economic Councils, and the Danish Council on Climate Change.

Expected outcomes and societal impact

The development of the GREEN REFORM model will allow policy makers and independent researchers to undertake a more systematic, comprehensive and consistent evaluation of the environmental impact of public policies and a more rigorous assessment of the relative effectiveness of alternative environmental and climate policies. The project will thus create a useful (currently non-existing)  tool for an integrated assessment of Danish environmental and climate policies. The code for the GREEN REFORM model will be made available on an open source basis along with a baseline data set for the model.

References

Gerlagh, R., R. Dellink, M. Hofkes, and H. Verbruggen (2002). A measure of sustainable national income for the Netherlands. Ecological Economics 41, 157-174.

Kiuila, O. and T.F. Rutherford (2013). The cost of reducing CO₂ emissions: Integrating abatement technologies into economic modeling. Ecological Economics 87, 62-71.