1. ZEW Economic Effects of Co-ordinated and Non-co-ordinated Permit Schemes in an EU-Bubble An Applied General Equilibrium Analysis with the GEM-E3 Model Tobias F.N. Schmidt, ZEW

2. ZEW Overview of the Presentation l What is the issue to be analysed? l What are the characteristics of the GEM-E3 model? l What answers can the model give with respect to the issue analysed? l Which conclusions can be drawn?

3. ZEW What is the issue? l Burden sharing agreement of the EU Council of Ministers versus trading of emission rights. l What are the economic consequences of sticking to domestic action? l What are the impacts of trading of emission rights across the EU?

4. ZEW Table 1: EU Burden Sharing Agreement

5. ZEW Characteristics of GEM-E3 l CGE-model for studying economy-energy- environment interactions l Multi-country, multi-sectoral model (14 EU-countries, 18 sectors) l Open economies linked through bilateral trade flows l Social accounting framework l Recursively dynamic l Standard version: perfect competition

6. ZEW Production Structure in GEM-E3

7. ZEW Consumption in GEM-E3

8. ZEW Baseline and Scenario Assumptions l Baseline - 1.8% to 2.5% annual growth in the EU - increase of world energy prices l General scenario assumptions - 8% reduction of EU-wide 1990 CO2 emissions until 2012 - Realisation through tradable emission permit schemes - Reduction & trade of permits realised during the budget period 2008-2012

9. ZEW Specification of the Permit Scheme l Initial allocation of permits: free of charge according to burden sharing agreement of the Council of Ministers. l Grandfathering across firms and households within the countries. l Marginal decision of polluters based on opportunity costs l Rents related to free-of-charge allocation of permits increase capital income

10. ZEW Policy Scenarios l Policy 1: No Trade non-co-ordinated domestic actions: national permit schemes l Policy 2: Free Trade co-ordinated action: EU-wide permit scheme, i.e. free trade of permits across member states

11. ZEW Table 2: Total Atmospheric Emissions in EU-14 in 2012

12. ZEW Table 3: Macroeconomic Aggregates for EU-14 in 2012

13. ZEW Table 3: CO2 Emissions and Permit Price in 2012

14. ZEW Table 4: CO2 Emissions and GDP in 2012

15. ZEW Table 5: Comparing Free Trade and No Trade

16. ZEW Reasoning l Buying or holding permits increases input prices for primary energy inputs --> distortion in intermediate demand. l Rents related to free-of-charge allocation and sale of permits increase capital income. l The distortionary effect of the former exceeds the re-distortion achieved by the latter.

17. ZEW Table 6: Trade of Permits and Ceilings l Ceilings: EU proposal l formula:

18. ZEW Conclusions I l Free trade of permits reduces the overall mitigation cost for the EU. l If trade is on the level of private entities, there are - compared to the no trade case - winners and losers of free trade: Net-buyers win, net-sellers lose. l Considering opportunity costs for holding permits produces distortions that are not fully compensated by the rents linked to the sale of permits (reasoning: public finance).

19. ZEW Conclusions II l An outcome based allocation rule of the overall gains could make all countries better off. l The issue of ceilings is of minor importance within the EU-bubble. l Under free trade of permits, only Greece and Portugal (net-sellers) would exceed the amount allowed by the EU proposal.

20. ZEW Table 7: CO2 Target and Actual Effort in 2012