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This article delves into the concept of carbon leakage, its measurement, and importance in the context of climate change mitigation. It discusses economic costs, environmental effectiveness, size of coalitions, and offers an overview of carbon leakages in the Kyoto Protocol. The text explores various channels for leakages, like the trade, energy, and investment channels, using static and dynamic models. Results indicate factors influencing leakage rates, such as trade substitution, supply elasticity of coal, and technological flexibility. Investment reallocation and capital mobility are also crucial in determining leakage dynamics over time, especially in a dynamic framework.
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International Trade and Investment Leakage Associated with Climate Change MitigationJean-Marc Burniaux(GTAP and OECD)
What carbon leakage means ? How to measure it ? Why is it important ? • Economic costs of participating countries. • Environmental effectiveness. • Size of coalition.
Carbon leakages in Kyoto : an analytical overview • there is a large disagreement among models about the • size of carbon leakages generated in implementing the Kyoto Protocol. • - high side estimates : 20-40 % (MERGE, Light et al., Worldscan). • - low side estimates : below 10 % (GREEN, G-Cubed). • Little empirical evidence to validate these results. • Uncertainty is large about the values of the key parameters. So sensitivity analysis is needed!
1) the trade channel. Key parameters • loss of competitiveness of energy-intensive industries in Annex 1 countries. • trade substitution elasticities (Armington) 2) the energy channel. • fall of the carbon price in non-Annex 1 countries • supply elasticities of carbon. • Trade substitution elasticities of carbon. 3) The investment channel • reallocation of foreign direct investment across countries • degree of international capital mobility. • investment behaviour and expectations. Channels for leakages.
The approach : based on several models; static and dynamic. • Typically a GE issue. • Experience with the OECD GREEN model. • A static prototype for extensive sensitivity analysis. • A new dynamic GTAP model with a full specification of investment behavior. GDYN-E
Result 1(1) The degree of substitution on non-energy markets (Armington elasticities) and does not matter a lot for the rate of leakages. (except for very low values of the trade sustitution elasticities) • Burniaux et Oliveira Martins, Economic Department Working Paper, No242, • OECD, 2000
Result 2 The value of the supply elasticity of coal is, by far, the key factor.
Result 4 The elasticity of coal supply is more influential than the degree of substitution on the coal market
Result 5 • The degree of technological flexibility matters ! (negative leakages).
Result 6 In a static framework, capital mobility has little impact, whatever the degree of technological adjustment ….. … but this is no longer true in a dynamic framework !!!!
But how does this outcome transpose in a dynamic setting ? • Dynamic GDYN-E : • Dynamic GTAP (Ianchovichina and McDougall, 2001) • International capital mobility with full account of assets ownership and location; • Explicit investment behavior … • … based on adaptive expectations. • + the production structure of GTAP-E (Truong, 1999). • … and extended to deal with CO2 policies (Burniaux, 2001)
Does capital mobility in a dynamic framework change the outcome about leakages ? No ! ...Oops ! ?
Leakage decomposition over time in GDYN-E ….. over the longer run, investment reallocation becomes a major factor.
Ror Act. Actual investment schedule Targ. (1) (2) (3) Expected investment schedule Exp. K Kstock Leakage dynamics : the investment reaction.
Actual = Expected schedules Ror Act=Exp=Targ Targ Actual Kstock Leakage dynamics : the case of a non-Annex 1 country. Investment increases because the rate of return is attractive compared with A1 countries and investors revise their expectation about the normal rate of growth upward.
Actual = Expected schedules Ror Act=Exp=Targ Act = Targ Actual Kstock Leakage dynamics : the case of an Annex 1 country. Investment decreases because investors revise their expectation about the normal rate of growth downward.
Leakage dynamics : the importance of the expected investment behavior. Little impact !
Leakage dynamics : the role of trade elasticities. Same outcome as in static …. But higher trade substitution implies higher investment outflows from A1
Leakage dynamics : the role of the coal supply elasticity. Need a fairly low value of coal supply elasticity (<1) to get high leakage rates !
Leakage dynamics : the role of technology substitution. Investment reallocation may generate high leakages in case of low substitution possibilities.
Assessment • For “reasonable” parameter values : the leakage rate is likely to be small … • … and investment reallocation does not matter. • But alternative values of some key parameters may generate quite substantial amount of leakage … • … and under certain circumstances, investment reallocation induces high leakages. • Over the longer term, investment reallocation becomes a critical component of leakages.
8% without US > 5% with US 2.7% with A1 trading < 5% without A1 trading The policy design influences the amount of leakages : • the size of the acting coalition : the larger the coalition, the smaller the leakages. • “hot air” reduces leakages. • the use of the flexibility mechanisms reduces leakages.
Implications for further researchs • Further empirical evidence about the value of key parameters is badly needed : • Value of coal supply elasticity. • Behavior of oil producers. • Transitional rigidities in technological adjustment (putty-clay) may increase the leakages over the medium term.