GTAP_E Presented by Belay Fekadu, Farzad Taheripour, Patrick Georges, David Mayer-Foulkes, Marianne Aasen, Hyun-Sik Chung, Kenatro Katsumata, Christa Clapp

Presentation Outline

Annex 1 without USA

Emissions targets

Energy Substitution Possibilities Aim of experiment: Examine the effect of higher elasticity of substitution between capital and energy under carbon emission quotas Base Case: Kyoto Protocol with emission trading among Annex 1 countries Annex 1 countries (USA, EU, Japan, Rest of Annex 1) have carbon emission quotas following 1st commitment period of Kyoto Protocol Annex 1 countries are allowed to trade carbon emission permits freely Annex 1 countries are allowed to purchase emission permits from EEFSU σKE for energy-intensive industry sector in all regions = 0.5 Experiment: Builds on Reference Case with increased elasticity of substitution between capital and energy in the energy-intensive industry sector Increase ELKE parameter (σKE) for energy-intensive industry sector in all regions to 5.0

Energy Substitution Possibilities Capital-Energy subproduct sKE Capital Energy subproduct sEN Non-electrical Electrical sNEL Non-coal Coal sNCOAL Gas Oil Petroleum products

Energy Substitution Possibilities Carbon Permit Price & Carbon emissions Annex 1 regions: In Experiment, firms are able to substitute away from carbon-intensive energy towards capital This makes it easier to meet carbon emission quotas & results in lower carbon permit price Results in less emission reductions than in Base Case due to trading with EEFSU EEFSU: Annex 1 countries purchase more carbon reductions in EEFSU in Experiment because emission reductions are even cheaper with less energy use in EEFSU Outside Annex 1: In Experiment, firms will substitute towards energy since it is relatively cheaper than capital Because they do not have carbon quotas, emissions increase   RCTAX gco2t base exp USA 76.5 49.9 -26.3 -25.4 EU 76.6 50.0 -14.3 -13.2 EEFSU 75.1 49.2 -26.6 -30.0 JPN -15.5 -14.4 RoA1 76.8 50.1 -21.0 -21.1 EEx 0.0 2.7 4.1 CHIND 1.1 RoW 3.6 4.9

Energy Substitution Possibilities CAPENDEMAND: qf(i,j,r)   USA EU EEFSU JPN RoA1 EEx CHIND RoW base capital -1.6 0.0 -8.4 -0.3 2.9 1.1 1.6 energy -13.1 -5.4 -25.8 -5.0 -8.8 4.3 2.1 exp 18.0 11.3 55.4 10.2 15.4 -0.1 -2.3 -1.9 -47.4 -19.2 -56.2 -17.5 -33.9 11.6 6.3 9.2 Demand for Capital and Energy Annex 1: In Experiment, firms are able to substitute away from carbon-intensive energy towards capital Results in higher demand for capital, lower demand for energy EEFSU: Same story as Annex 1, because of carbon trading bloc (Annex 1 purchases cheaper reductions in EEFSU) Non-Annex 1: In Experiment, firms will substitute towards energy because it is relatively cheaper than capital

Energy Substitution Possibilities WELFARE   1 co2trd 2 alloc_A1 3 endw_B1 4 tech_C1 5 pop_D1 6 tot_E1 7 IS_F1 8 pref_G1 Total base USA -10710 -12960 4959 64 -18646 EU -5691 -15167 5256 -153 -15756 EEFSU 23306 -4834 2097 109 20678 JPN -4208 -7140 3083 -147 -8412 RoA1 -2915 -5454 -2588 77 -10879 EEx -539 -14952 -27 -15519 CHIND 660 -20 612 RoW 1194 2072 96 3362 -218 -44239 -101 -1 -44560 exp -7652 -8384 5471 375 -10190 -4215 -14863 5070 -272 -14280 16551 -4460 1396 167 13654 -2931 -7278 3241 -298 -7266 -1887 -5146 -2735 -6 -9774 -140 -14324 -34 -14498 1069 -31 1038 1613 1792 97 3502 -134 -37588 -90 -2 -37814 For Annex 1: Welfare is decreased less with greater σKE in energy-intensive industries For EEFSU: Welfare is lower in Experiment , because it receives less payment for carbon permits For non-Annex 1: welfare is generally better in the Experiment, although for EEx it is still negative

Energy Substitution Possibilities Conclusions Capital–Energy substitution can have an important impact on production input choices, and thus can impact carbon emissions, carbon permit prices, and welfare Impacts of Capital-Energy substitution are largely affected by whether a region is subject to a carbon quota

Tax Replacement Implications

Concluding Comments Complex interactions between energy, emissions & economy Policy choices & design have economic implications: Choice of environmental policy instrument (carbon tax vs. carbon emission quotas) impacts welfare, terms of trad Level of emission quotas and allocation (historical emissions, emissions/output, emissions/capita) impact welfare Participation in climate treaties (U.S., developing countries) impacts emissions and trade leakage, i.e. movement of energy-intensive industries towards regions that are outside of the carbon quota area Technology (energy-efficiency, capital turnover) has economic implications: Capital-Energy substitution impacts production choices (either towards energy or towards capital), carbon permit prices, welfare