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

2. Presentation Outline

3. Annex 1 without USA

4. Emissions targets

5. 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

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

7. 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

8. 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

9. 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

10. 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

11. Tax Replacement Implications

12. 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