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

2 Presentation Outline GTAP Energy Application (GTAP-E) –Theoretical structure –Three experiments: Emission quota with no emission trading Emission quota with emission trading among annex 1 (USA, JPN,FSU,EU, RoA1) Emission quota with worldwide emission trading –New experiments: Carbon tax and tax replacement effect Emission targets Annex 1 without USA Energy substitution possibilities

3 GTAP Energy Application (GTAP-E) It focuses on the impacts of energy-environmental policies GTAP-E follows the standard GTAP structure with some modifications and additions such as: –Emission accounting –Emission permits and emission trading mechanisms –Carbon taxation –Production structure and substitution between energy and capital

4 Main Results of Three Existing Experiments Country or Region No Emissions Trading Emission trading among annex 1 countries Worldwide Emission trading % Reduction in emissions 1997 USD per tonne of carbon % Reduction in emissions 1997 USD per tonne of carbon % Reduction in emissions 1997 USD per tonne of carbon USA EU EEFSU JPN RoA EEx CHIND RoW Marginal Costs of Achieving the Kyoto Targets with and Without Using the Flexibility Mechanisms

5 Tax Replacement Implications Environmental regulation in the presence of distortionary taxes: –Environmental taxes may improve economic effciency, if environmental tax revenues are used to cut pre-existing distortionary taxes (Tullock, 1967). Environmental regulation in an open economy: –Environmental taxes generates a term of trade effect. The terms of trade effect can be either positive or negative depends on the demand and supply elasticities (Krutilla, 1991).

6 Tax Replacement Implication (Cont’d) Revenue Recycling Effect P X PMC PMC + t E X1X2Q*Q* QL P Pc Deadweight loss of preexisting tax Pollution tax and government revenuesUsing pollution taxes to cut the preexisting tax The government revenues Pp tctc

7 Tax Replacement Implications Two scenarios: –$10 nominal carbon tax imposed on the US economy –A neutral tax replacement: Carbon tax revenues are used to reduce import tax rates on non-energy commodities Approach: –From the first scenario we determined total tax revenues from the carbon tax –For the second scenario an iteration approach is used to achieve: Carbon Tax Revenues = Reduction in Import tax Revenues

8 Tax Replacement Implications (Cont’d) Results Country/Region Carbon Tax Carbon Tax and Import Tariff Reduction alloc_A1 tot_E1 alloc_A1 tot_E1 1 USA EU EEFSU JPN RoA EEx CHIND RoW Total Major Welfare effects (EV in million 1997 USD)

9 Tax Replacement Implications (Cont’d) Results % Reduction of Emissions Country/Region Carbon Tax Carbon Tax and Import Tariff Reduction 1 US EU EEFSU JPN RoA EEx CHIND RoW

10 Tax Replacement Implications (Cont’d) Results % Reduction of Emissions Country/Region Carbon Tax Carbon Tax and Import Tariff Reduction Agriculture Coal Oil Gas Oil_Pcts Electricity En_Int_ind Oth_ind_ser CGDS

11 Tax Replacement Implications (Cont’d) Conclusions Introducing a carbon tax in to the economy deteriorates allocative efficiency However, when it is coupled with a reduction in import tax it improves the allocative efficiency Introducing a carbon tax generates benefits through the terms of trade but a reduction in import tax causes a negative terms of trade. Both policies reduce coal production significantly and reduce electricity production moderately.

12 Emissions targets Present Kyoto vs. Post-Kyoto flexible target (E.g. Emission/ GDP (i.e. emission intensity) as a new flexible target variable.) We are pessimistic: Kyoto target not reached Redistribute reduction target such that reduction intensity ratio (=total Annex 1 reduction/Annex 1 GDP) be the same for all Annex 1 regions.

13 Reduction intensity ratio : sum reductions Annex 1 / sum GDP Annex / = E-05 - Multiply the ratio with GDP of each Annex region to get redistribution of Kyoto reduction Experiment : -Emission trading among Annex 1 countries -2 scenarios: Kyoto and “our” distribution of Kyoto reduction target

14 Redistribution of Kyoto-reductions

15 New shocks in the model

16 The Results and Analysis When emission trading allowed, initial allocation of emission quotas doesn’t matter. Each region has the same percentage reduction in emissions in the two scenarios. Reduction emission (%)

17..but it matters to welfare..?

18 USA becomes exporter of permits in our scenario

19 Summing up and conclusion USA largely gains from permit trading, and minor gains from tot improvement EU loses more in scenario two, since they have to buy more permits EEFSU gain less in scenario two, due to decrease in revenue from permit trading Japan loses more in scenario two, since buy more permits RoA1 lose less in our scenario, buy less permits USA will participate in our regime!

20 Annex 1 without USA: main results Price of emissions decreases: cheaper hot air

21 Change in CO2 Emissions by Producers Quantity: Non-restricted countries increase emitting production a little

22 Percent Change in Value of Exports by Industry Trade: EU and non-restricted countries increase emitting production considerably

23 Price Index of Domestic Purchases (Producers) Price: However, expected price differences small in non-constrained countries

24 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 1 st 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 –σ KE 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 (σ KE ) for energy-intensive industry sector in all regions to 5.0

25 Energy Substitution Possibilities subproduct Capital-Energy subproduct Electrical Capital Energy subproduct  KE  EN Non-electrical Coal  NEL Gas  NCOAL Petroleum products Oil Non-coal

26 Energy Substitution Possibilities RCTAXgco2t baseexpbaseexp USA EU EEFSU JPN RoA EEx CHIND RoW 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 Carbon Permit Price & Carbon emissions

27 Energy Substitution Possibilities CAPENDEMAND: qf(i,j,r) USAEUEEFSUJPNRoA1EExCHINDRoW base capital energy exp capital energy 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

28 Energy Substitution Possibilities For Annex 1: Welfare is decreased less with greater σ KE 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 WELFARE 1 co2trd2 alloc_A13 endw_B14 tech_C15 pop_D16 tot_E17 IS_F18 pref_G1Total base USA EU EEFSU JPN RoA EEx CHIND RoW Total exp USA EU EEFSU JPN RoA EEx CHIND RoW Total

29 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

30 Concluding Comments