Modeling the Transport Sector: The Role of Existing Fuel Taxes in Climate Policy

Existing fuel taxes play a major role in determining the welfare effects of exempting the transportation sector from measures to control greenhouse gases. To study this phenomenon we modify the MIT Emissions Prediction and Policy Analysis (EPPA) model to disaggregate the household transportation sector. This improvement requires an extension of the GTAP data set that underlies the model. The revised and extended facility is then used to compare economic costs of cap-and-trade systems differentiated by sector, focusing on two regions: the USA where the fuel taxes are low, and Europe where the fuel taxes are high. We find that the interplay between carbon policies and pre-existing taxes leads to different results in these regions: in the USA exemption of transport from such a system would increase the welfare cost of achieving a national emissions target, while in Europe such exemptions will correct pre-existing distortions and reduce the cost.

Coordinating Inventory Control and Pricing Strategies with Random Demand and Fixed Ordering Cost: The Finite Horizon Case

We analyze a finite horizon, single product, periodic review model in which pricing and production/inventory decisions are made simultaneously. Demands in different periods are random variables that are independent of each other and their distributions depend on the product price. Pricing and ordering decisions are made at the beginning of each period and all shortages are backlogged. Ordering cost includes both a fixed cost and a variable cost proportional to the amount ordered. The objective is to find an inventory policy and a pricing strategy maximizing expected profit over the finite horizon. We show that when the demand model is additive, the profit-to-go functions are k-concave and hence an (s,S,p) policy is optimal. In such a policy, the period inventory is managed based on the classical (s,S) policy and price is determined based on the inventory position at the beginning of each period. For more general demand functions, i.e., multiplicative plus additive functions, we demonstrate that the profit-to-go function is not necessarily k-concave and an (s,S,p) policy is not necessarily optimal. We introduce a new concept, the symmetric k-concave functions and apply it to provide a characterization of the optimal policy.

Coordinating Inventory Control and Pricing Strategies with Random Demand and Fixed Ordering Cost: the Infinite Horizon Case

We analyze an infinite horizon, single product, periodic review model in which pricing and production/inventory decisions are made simultaneously. Demands in different periods are identically distributed random variables that are independent of each other and their distributions depend on the product price. Pricing and ordering decisions are made at the beginning of each period and all shortages are backlogged. Ordering cost includes both a fixed cost and a variable cost proportional to the amount ordered. The objective is to maximize expected discounted, or expected average profit over the infinite planning horizon. We show that a stationary (s,S,p) policy is optimal for both the discounted and average profit models with general demand functions. In such a policy, the period inventory is managed based on the classical (s,S) policy and price is determined based on the inventory position at the beginning of each period.

Effects of Air Pollution Control on Climate

Urban air pollution and climate are closely connected due to shared generating processes (e.g., combustion) for emissions of the driving gases and aerosols. They are also connected because the atmospheric lifecycles of common air pollutants such as CO, NOx and VOCs, and of the climatically important methane gas (CH4) and sulfate aerosols, both involve the fast photochemistry of the hydroxyl free radical (OH). Thus policies designed to address air pollution may impact climate and vice versa. We present calculations using a model coupling economics, atmospheric chemistry, climate and ecosystems to illustrate some effects of air pollution policy alone on global warming. We consider caps on emissions of NOx, CO, volatile organic carbon, and SOx both individually and combined in two ways. These caps can lower ozone causing less warming, lower sulfate aerosols yielding more warming, lower OH and thus increase CH4 giving more warming, and finally, allow more carbon uptake by ecosystems leading to less warming. Overall, these effects significantly offset each other suggesting that air pollution policy has a relatively small net effect on the global mean surface temperature and sea level rise. However, our study does not account for the effects of air pollution policies on overall demand for fossil fuels and on the choice of fuels (coal, oil, gas), nor have we considered the effects of caps on black carbon or organic carbon aerosols on climate. These effects, if included, could lead to more substantial impacts of capping pollutant emissions on global temperature and sea level than concluded here. Caps on aerosols in general could also yield impacts on other important aspects of climate beyond those addressed here, such as the regional patterns of cloudiness and precipitation.