Coal Markets and the Kyoto Protocol Miles Light University of Colorado, Boulder Charles Kolstad University of California, Santa Barbara Thomas F. Rutherford University of Colorado, Boulder January, 1999AEA Annual ConferenceSGE Session on International Trade

Outline of Talk n Key Issues which connect Climate Change and International Trade F Global emissions targets F Carbon “leakage” n Development of the International Coal Market F Toward a homogeneous coal commodity n Modeling framework - A CGE analysis of carbon abatement using the GTAP/IEA dataset n Results and Policy Prescriptions

Issues n Coal accounted for 40% of CO2 emissions in Despite coal’s large role in determining global carbon emissions, coal markets have been neglected. n International coal is becoming homogeneous, which implies carbon “leakage” and abatement costs may be much higher than anticipated. n Possible policy: Carbon export restrictions for coal. F Leakage rate and abatement costs fall substantially F But this tax may be controversial

Insights n If coal continues to develop into a homogeneous commodity, current studies under-estimate the costs of attaining a global emissions target. n The increased costs are caused by substantially higher carbon leakage rates: from 20% to 40%. n Key difference: differentiated coal assumption limits coal flows when prices change in US, China. n An export tax upon coal would effectively limit coal migration, and leakage, but such a policy may be contested by oil exporters. F A Coal export tax is a source based tax, where the abating countries receive the tax revenues. F Oil would be subject to a use based tax, where the abating countries also receive the tax revenues.

International Coal Trade n There is a unified, developed international coal market F Trade is 12% of total production, compared with 4% 25 years ago F Most coal prices follow the US FOB price (Ellerman 1985) F Competition has increased as Indonesia, Venezuela, Colombia, and Former Soviet Union have entered the market n Technology allows for higher substitutability between coal types F Pulverized Coal Injection (PCI) allows coking coal to be replaced by steam coal in steel mills F Coal washing and slurries increases the embodied energy in a ton of coal F Mixing different coal types F Coal prices depend mostly upon embodied energy content

The Model n Static, general equilibrium framework n Data combines the GTAP dataset with the IEA energy statistics to keep value flows consistent with real flows. n World is partitioned into 13 regions and 8 types of goods. n 7 goods are energy specific, the last being ‘all other goods’. n An Arrow-Debreu equilibium is supported by zero excess profits, market clearance and budget exhaustion. n A long-term outlook is adopted, so unemployment and other frictions are ignored.

Key Equations n An ad-valorem tax is applied to fossil fuels according to the carbon content: n International trade adopts the Armington assumption: differentiated products between domestic and imports, as well as across imports from different regions. n CES structure for Armington Agregate Commodity: n We vary and which allows for both heterogeneous and homogeneous coal trade.

Results n Leakage table: Carbon leakage doubles when coal is homogeneous. Percentage Leakage Rates in 2010 with OECD (Kyoto) Abatement Asia Brazil Central Europe China India Mexico+OPEC R.O.W Global Global Emissions Emissions Units: Billions of Metric Tons per year.

Results (cont.) n Welfare falls from -0.4 to -1.1 for Annex B, rises slightly for China and India, and falls steeply for OPEC and oil exporters. Percenatge Welfare Changes in 2010 with OECD (Kyoto) Abatement Asia Brazil Central Europe China Europe India Mexico+OPEC Other OECD R.O.W USA Global Leakage Abatement Mult Global Emissions

Policy: Export Taxes n Effecively reduces carbon leakage from coal exports. n It is optimal to increase tax until exports to non-abating countries is eliminated. Marginal costs of abatement outweigh marginal benefit of lower export taxes. n But controversial: OPEC, other oil exporters will contest any export tax policy, due to the conflict between use-based taxes with source-based taxes. n However, export taxes do not improve welfare proportionally.

Leakage, abatement and export taxes: n Less abatement as coal prices increase for non-abating regions.