GTAP_E

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 • GTAP Energy Application (GTAP-E) • Theoretical structure • Three experiments: • Emission quota with no emission trading • Emission quota with emission trading among annex 1 (USA, JPN,FSU,EU, RoA1) • Emission quota with worldwide emission trading • New experiments: • Carbon tax and tax replacement effect • Emission targets • Annex 1 without USA • Energy substitution possibilities

3. GTAP Energy Application (GTAP-E) • It focuses on the impacts of energy-environmental policies • GTAP-E follows the standard GTAP structure with some modifications and additions such as: • Emission accounting • Emission permits and emission trading mechanisms • Carbon taxation • Production structure and substitution between energy and capital

4. Main Results of Three Existing Experiments Marginal Costs of Achieving the Kyoto Targets with and Without Using the Flexibility Mechanisms

5. Tax Replacement Implications • Environmental regulation in the presence of distortionary taxes: • Environmental taxes may improve economic effciency, if environmental tax revenues are used to cut pre-existing distortionary taxes (Tullock, 1967). • Environmental regulation in an open economy: • Environmental taxes generates a term of trade effect. The terms of trade effect can be either positive or negative depends on the demand and supply elasticities (Krutilla, 1991).

6. Tax Replacement Implication (Cont’d)Revenue Recycling Effect P Deadweight loss of preexisting tax P The government revenues Pc tc PMC + tE Pp PMC X2 X1 X Q Q* L Pollution tax and government revenues Using pollution taxes to cut the preexisting tax

7. Tax Replacement Implications • Two scenarios: • $10 nominal carbon tax imposed on the US economy • A neutral tax replacement: Carbon tax revenues are used to reduce import tax rates on non-energy commodities • Approach: • From the first scenario we determined total tax revenues from the carbon tax • For the second scenario an iteration approach is used to achieve: Carbon Tax Revenues = Reduction in Import tax Revenues

8. Tax Replacement Implications (Cont’d)Results Major Welfare effects (EV in million 1997 USD)

9. Tax Replacement Implications (Cont’d)Results % Reduction of Emissions

10. Tax Replacement Implications (Cont’d)Results % Reduction of Emissions

11. Tax Replacement Implications (Cont’d)Conclusions • Introducing a carbon tax in to the economy deteriorates allocative efficiency • However, when it is coupled with a reduction in import tax it improves the allocative efficiency • Introducing a carbon tax generates benefits through the terms of trade but a reduction in import tax causes a negative terms of trade. • Both policies reduce coal production significantly and reduce electricity production moderately.

12. Emissions targets • Present Kyoto vs. Post-Kyoto flexible target (E.g. Emission/ GDP (i.e. emission intensity) as a new flexible target variable.) • We are pessimistic: Kyoto target not reached • Redistribute reduction target such that reduction intensity ratio (=total Annex 1 reduction/Annex 1 GDP) be the same for all Annex 1 regions.

13. Reduction intensity ratio: sum reductions Annex 1 / sum GDP Annex 1 -837.2 / 22544597.25 = -3.714E-05 - Multiply the ratio with GDP of each Annex region to get redistribution of Kyoto reduction Experiment: • Emission trading among Annex 1 countries • 2 scenarios: Kyoto and “our” distribution of Kyoto reduction target

14. Redistribution of Kyoto-reductions

15. New shocks in the model

16. The Results and Analysis • When emission trading allowed, initial allocation of emission quotas doesn’t matter. Each region has the same percentage reduction in emissions in the two scenarios. Reduction emission (%)

17. ..but it matters to welfare..?

18. USA becomes exporter of permits in our scenario

19. Summing up and conclusion • USA largely gains from permit trading, and minor gains from tot improvement • EU loses more in scenario two, since they have to buy more permits • EEFSU gain less in scenario two, due to decrease in revenue from permit trading • Japan loses more in scenario two, since buy more permits • RoA1 lose less in our scenario, buy less permits • USA will participate in our regime!

20. Annex 1 without USA: main results Price of emissions decreases: cheaper hot air

21. Change in CO2 Emissions by Producers Quantity: Non-restricted countries increase emitting production a little

22. Percent Change in Value of Exports by Industry Trade: EU and non-restricted countries increase emitting production considerably

23. Price Index of Domestic Purchases (Producers) Price: However, expected price differences small in non-constrained countries

24. 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

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

26. 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

27. Energy Substitution Possibilities 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

28. Energy Substitution Possibilities • 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

29. 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

30. Concluding Comments