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Ruslana Palatnik Mordechai Shechter

Can Climate Change Mitigation Policy Benefit the Israeli Economy? A Computable General Equilibrium Analysis. Ruslana Palatnik Mordechai Shechter. Outline. Introduction Model Data Results Simulation 1 Simulation 2 Simulation 3 Future development Current research at FEEM.

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Ruslana Palatnik Mordechai Shechter

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  1. Can Climate Change Mitigation Policy Benefit the Israeli Economy? A Computable General Equilibrium Analysis Ruslana Palatnik Mordechai Shechter Ruslana Palatnik

  2. Outline • Introduction • Model • Data • Results • Simulation 1 • Simulation 2 • Simulation 3 • Future development • Current research at FEEM Ruslana Palatnik

  3. Global warming process CO2, CH4, N2O, CFCs, etc. Ruslana Palatnik Global Warming Rachel Palatnik 3

  4. Why Climate Change Mitigation? • A worldwide issue of concern • Globally coordinated action • UNFCCC – UN Framework Convention on Climate Change: • Created in 1992 and ratified by Israeli government • Objective of stabilizing atmospheric GHG concentration • The Kyoto protocol (1997) - set emission limits on GHGs globally averaged by 6-7%relative to 1990 level by 2008-2012 • Post Kyoto agreement Ruslana Palatnik

  5. The aims of the study: • Build a static CGE model for the Israeli economy, with detailed analysis of energy flows • Answer the following research questions: • In what range would a carbon energy tax need to lie in order to meet the Israeli Kyoto target for energy-related emissions of CO2 (7% reduction)? • What would be the impact of such a carbon tax on the Israeli economy, welfare and emissions? • How would this carbon tax affect sectoral output, household consumption patterns and demand for the various energy commodities? • Perform sensitivity analysis • Check for double/employment dividend hypothesis. Ruslana Palatnik

  6. The aims of the study (Continued): • Two different schemes for recycling of the revenue of the carbon tax to be compared: • Proportional tax reduction • Reduction of the labor tax rate • Carbon emission trading market to be analyzed and compared to carbon taxes on the welfare maximization basis Ruslana Palatnik

  7. Type of Model: Computable General Equilibrium (CGE) • Computable: type of numerical simulation model – changes are introduced→ the resulting changes in GDP, welfare, output, employment… are calculated. • General Equilibrium: supply = demand in all markets simultaneously – all intermediate demands are taken into account, and effects that they have on other sectors are included. • Differs from traditional “partial equilibrium” analysis where price and quantity adjustments reach equilibrium in an isolated market. Ignoring connections with other markets → a wider range of effects are modeled. Ruslana Palatnik

  8. Related Literature • Single country CGE for carbon mitigation policy analysis: Böhringer and Rutherford (1997); Wissema and Dellink (2006); André et. al (2003); Bovenberg et. al (2003); Dissou et al. (2002)… • Multiple country CGE for carbon trade: Whalley and Wigle (1991); Viguier (2004); GTAP, GTAP-E, ORANI models… • Israel:Haim et al. (2007) ; Kan et al. (2007) ; Yehoshua and Shechter (2003); Kadishi, et al. (2005); Avnimelech, Y. et al. (2000) ; Gressel et al. (2000) …- partial equilibrium analysis. • Conclusion: CGE model for Israeli economy needed to analyze effects of economic incentives for GHGs emission mitigation Ruslana Palatnik

  9. Research structure • Developing a Static CGE Model • Constructing the Benchmark (SAM) Simulation 1: exogenous labour and capital supply; Carbon tax / auctionable permits recycled through proportional reduction of existing taxes. Simulation 2: sensitivity analysis. Simulation 3: endogenous labour supply; Carbon tax / auctionable permits recycled through labour tax. Ruslana Palatnik

  10. Rest of the World Technology I/O matrix Energy Export Import Import Net transfers Supply of commodities Intermediate Goods Producers Consumers Supply of capital, labor Supply of public goods transfers indirect and environmental taxes Government General model of the economy Labor, capital and consumption taxes Ruslana Palatnik

  11. The Model: General Features • Market clearing in: • all markets • goods and services • production factors • Zero excess profits • Balanced budget for each agent Ruslana Palatnik

  12. Y S:0 M KLE S:0.85 L KE S:0.65 K E S:0.1 ELEC FOS S:0.5 COAL OIL S:0 CRUDE REFINED The Model: Nesting Structure of the Production Function • Production: nested production structure using CES family of functions. Ruslana Palatnik

  13. Functional Form in Household Sector Household Welfare max U = Cobb-Douglas (CD1 ,…, CD18) s.t. Income constrain Ruslana Palatnik

  14. Functional Form in International Trade Ruslana Palatnik

  15. Functional Forms in Government Consumption, Export and Investment Ruslana Palatnik

  16. Market clearing conditions • Domestic Demand Di= Σj {IOi,j} + CDi+ GDi+ INVDi+ SDi • Armington Aggregate Supply IMi+ Σj {Y j,i} = Ai= Di+ EDi • Primary Factors ΣjLj= LS; determines pl ΣjKj= KS (fixed); determines pk • Ensuring closed financial cycle: Ruslana Palatnik

  17. The Model: Taxation • Indirect taxes less subsidies on products; • Taxes less subsidies on production; • Labor taxes; • Capital taxes; • Taxes on households; • Taxes on imports; • A counter-factual carbon energy tax or tradable permits Ruslana Palatnik

  18. Social Accounting Matrix (SAM) Structure Value-added [L(j), K(j)] Ruslana Palatnik

  19. Sectoral mapping • AFF Agriculture • ROIL Refined petroleum • COIL Extraction of crude petroleum and natural gas • COAL Mining and agglomeration of hard coal • MNF Manufacturing • ELE Electricity • WAT Water • CON Construction • TRD Wholesale and retail trade repairs of vehicles • ASR Accommodation services and restaurants • TRC Transport storage and communications • BIF Banking insurance and other financial institutions • BAC Real estate renting and business activities • PAD Public administration • EDU Education • HWS Health services and welfare and social work • CSS Community social personal and other services • IBS Imputed bank services and general expenses From 162-industry aggregation tables Ruslana Palatnik

  20. Data: Macro Social Accounting Matrix (1995 in Million NIS) Ruslana Palatnik

  21. Data: Relative contribution of CO2 emissions by sector due to fuel combustion and electricity consumption in Israel in 1995 (Source: Avnimelech , 2002) Ruslana Palatnik

  22. Data: Fuel consumption and CO2 emissions by sectors. Source: Avnimelech (2002) Ruslana Palatnik

  23. Simulation 1: The Sectoral Impacts of Carbon Taxes on the Israeli Economy Ruslana Palatnik

  24. Simulation 1: The Sectoral Impacts of Carbon Taxes on the Israeli Economy (continued) Ruslana Palatnik

  25. Simulation1: Sectoral Marginal Abatement Cost Curves for Israel. Ruslana Palatnik

  26. Simulation1: Impact of Carbon tax on sectoral emission Ruslana Palatnik

  27. Simulation1: The Aggregate Economic Impacts of Carbon Taxes Ruslana Palatnik

  28. Simulation1:The Sectoral Impacts of Auctionable Permitson Israeli Economy Ruslana Palatnik

  29. Y Y S:0 M M KLE KLE S:0.5 LK LK E E S:0.5 L L K K Rest nests unchanged Rest nests unchanged S:0 S:0.25 S:0.5 Simulation 2: Nesting Structure of 3 Production Functions Modeled. (KL)ENest, Finish elasticities (van der Werf , 2007) Initial Production Function (KL)ENest, Italian elasticities (van der Werf , 2007) S:0 M KLE S:0.5 Ruslana Palatnik

  30. Simulation2:Marginal Abatement Curves of the Israeli Economy for Various Production Function Definitions Ruslana Palatnik

  31. Simulation 2:The Aggregate Economic Impacts of Carbon Taxes and Auctionable Permits via Production Function definition Ruslana Palatnik

  32. Simulation3: Economic Impacts of Carbon Tax (Unemployment Case) Ruslana Palatnik

  33. Simulation 3: Sensitivity of economic indicators to changes of the elasticity of substitution between labour-capital and energy composites: 7% abatement target. Ruslana Palatnik

  34. Future Analysis • Updated SAM (in 2009 publication for I-O table 2006); • Natural gas – energy resource; • Check for additional energy tax revenues recycling schemes; • Dynamic CGE model; • Sector-specific factors where appropriate (e.g. in agriculture, energy); • Differentiate factors (e.g. skilled versus unskilled labour); • Include other greenhouse gases; • Introduce imperfect competition in energy sector; • Introduce technological change. Ruslana Palatnik

  35. Current Research (FEEM) • ICES: Intertemporal Computable Equilibrium System • World Climate Change adaptation costs and benefits focusing on agricultural sector • Biofuels as Climate Change mitigation policy • Water issues Ruslana Palatnik

  36. Castello, 5252 - I-30123 Venezia, - Italy tel +39 | 041 | 2711483 fax +39 | 041 | 2711461 web http://www.feem.it Ruslana Palatnik

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