Through a dynamic model of energy system change the paper examines the role of innovation in bringing about a low carbon energy system. The processes of innovation and technological substitution are cumulative, dynamic, and highly non-linear processes such that how the energy system evolves in the long term is extraordinarily sensitive to the strength and duration of the initial policies. It is possible, under some policy assumptions, that energy systems would continue to depend on fossil fuels for so long as fossil fuels remain abundant and the least cost resource; and under other assumptions, after allowing for the unavoidable lags associated with investment and the building up of a new capital stock, that fossil fuels would become almost wholly displaced by the non-carbon alternatives. The implication is that the external benefits of innovation, which include the creation of options and the reduction of costs arising directly from innovation itself, and the reduction of environmental damage, are far greater, perhaps by orders of magnitude, than the traditional cost–benefit models used for the analysis of climate change mitigation. The analysis suggests why a focus on discovery and innovation offers a promising way forward for national and international policies on climate change.

As different regions of the world integrate, many questions arise regarding the effect on the location of firms. A firm's decision to relocate operations when its home country integrates with another region is in general influenced by the relative marginal cost of production between the regions, the cost of relocation, the cost of exporting its good across borders, as well as the relative size of the two regions. Except for market size, these variables crucially depend upon the degree of economic integration, ranging from simple bilateral trade agreements, to agreements that make foreign direct investment easier and cheaper, to full economic integration that harmonizes policies across the regions. We develop a model in which we explore the possible forms of integration in the context of two illustrative applications: US–Mexico under NAFTA and Central and Eastern European countries and the European Union.

In many regions of the world, property rights to natural resources are held under various forms of communal ownership, which often exhibit flexibility for users to access different resources depending on relative need. This paper explores the links between climate variability, transactions costs associated with resource access, and patterns of herd mobility in northern Kenya. Results indicate that greater spatial variability of vegetation leads to greater herd mobility, and that higher transaction costs reduce mobility for herds engaged in long-distance movements. Moreover, long-distance mobility is higher in drought years only in those communities with greater spatial and seasonal variability of vegetation.

This paper develops four agricultural household models of forest clearing – as both an input for current production and an investment in future production – over two periods under distinct land and labor market institutions. Five different effects of policies on farmers' forest clearing decisions are identified. Careful comparison of their relative magnitudes reveals (potential) pro-forest policies under distinct market conditions. In Latin American countries, poor early settlers are often bid off their cleared land after or without cultivation by wealthy large holders. With this ‘sell-out effect,’ price transfer and technological transfer for soil management targeting poor colonists and policy reforms eliminating land price distortions are recommended to arrest deforestation. On the other hand, especially in places where land transaction opportunities are nil like Sub-Saharan African countries, policies promoting non-agricultural activities among poor farmers are needed.

This study is the first systematic attempt to test statistically the contrasting hypotheses on the emission of SO2 and CO2, and energy consumption in Japan and China for the last few decades. We postulate the hypotheses that local governments have incentives to internalize the local external diseconomies caused by SO2 emissions, but not the global external diseconomies caused by CO2 emissions. To substantiate our hypotheses, we decompose emissions of SO2 and CO2 into two factors: the emission factor (i.e. emission per energy use) and energy consumption. The results show that the prefectures where past energy consumption was high tend to reduce the emission factor of SO2 significantly in Japan, while we do not find such a tendency in China. There is also evidence that neither per capita income nor past energy consumption affects the CO2 emission factor and energy consumption significantly in both Japan and China, implying that an individual country has few incentives to reduce CO2 emissions.

In future agreements to cut greenhouse gases, a Chinese commitment will probably be essential. Committing for China is easier if the cost is low and the benefit to China is high. Using a new CGE-model of the Chinese economy we discuss the cost and benefit to China of taking on a climate commitment. We argue that a climate commitment gives significant ancillary benefits to China since associated particle and NOx-reductions improve public health and increase agricultural yields. The model of impact on agricultural yields is a novel feature of CGE-models. Comparing benefits to economic costs produces striking results. We find that China may reduce its CO2-emissions by 17.5 per cent without suffering a welfare loss. Half of the benefit originates in the novel agricultural model. We also discuss the distributional impact of a climate commitment. In general the distributional impact is not averse.