General Equilibrium, New Markets and the Economics of Climate Change

We propose a general equilibrium analysis of the economic consequences of the opening of new markets, such as markets of allowances created as a companion measure for climate change mitigation and adaptation. In the first chapter, we introduce a theoretical framework: an economy with externalities and non-convexities. We establish an index formula and obtain as corollaries existence of equilibria with general pricing rules. In the second chapter, the opening of an allowance market appears as a perturbation of this initial equilibrium state. We then determine which changes in the firms behavior ensure the existence of an equilibrium in the enlarged economy. This result can be interpreted as ensuring the economy can undergo the opening of a market of allowances without huge modifications of its organization. In the third chapter we analyze the influence of the opening of an allowance market on the optimality properties of the marginal pricing equilibria. Pareto Optima can indeed be decentralized thanks to the free provision of an environmental public good by the government: the difference between the governmental supply of allowances and the situation that prevails under laissez-faire. We then studied refined notions of equilibria in order to strengthen the relations between Pareto Optima and equilibria through increased consumer participation in the market of allowances. In the last chapter, we extend the decentralization problem to the case where the production capacities upon which Pareto optimality is defined may differ from the aggregate of the firms expectations about their production possibilities. This issue is raised in order to account for the seemingly different expectations of firms and governments on the economic consequences of climate change. We then show the government can create a 'production allowance' market in order to lead the firms to produce according to its expectations. (author)