Carbon Reduction Potential and Economic Impacts in Japan: Application of AIM

1. Carbon Reduction Potential and Economic Impacts in Japan: Application of AIM Contents: What’s AIM? CO2 reduction in Japan Model analysis AIM/Enduse AIM/Top-down AIM/Material Conclusion Toshihiko Masui National Institute for Environmental Studies http://www-iam.nies.go.jp/aim/index.htm Workshop on Climate Policy and Energy Modeling International Trade Center, Taipei, Taiwan October 11-12, 2004

2. Outline of AIM What’s AIM? CO2 reduction in Japan Model analysis AIM/Enduse AIM/Top-down AIM/Material Conclusion AIM, NIES

3. CO2 reduction target in Japan • After Russia announced ratification of Kyoto Protocol, GHGs emissions reduction target becomes a reality! What’s AIM? CO2 reduction in Japan Model analysis AIM/Enduse AIM/Top-down AIM/Material Conclusion AIM, NIES

4. Total 2% of CO2 reduction is assumed to be target. CO2 reduction target in Japan • Kyoto Protocol • In Japan, GHG emissions in the 1st commitment period (2008-2012) should be reduced by 6% of those in 1990. • New Climate Change Policy Programme (2002, Gov. of Japan) • CO2 emissions from energy use: ±0% • Reduction by innovative technologies and change of lifestyle: -2% • Others • CO2 emissions from non-energy use, methane emissions, and nitrous oxide emissions: -0.5% • Emissions of HFCs, PFCs and SF6: +2.0% • The use of Sinks: -3.9% What’s AIM? CO2 reduction in Japan Model analysis AIM/Enduse AIM/Top-down AIM/Material Conclusion AIM, NIES

5. Model analysis on CO2 reduction policy • Model approaches • Bottom-up approach: represent reality • Top-down approach: represent consistency • Mixture of these 2 approaches; • Bottom-up (technology) • AIM/Enduse model: Potential CO2 reduction and carbon tax & subsidy to technologies • Top-down (economic theory) • AIM/Top-down model: International competitiveness of energy intensive industries • AIM/Material model: Detailed economic impact in Japan What’s AIM? CO2 reduction in Japan Model analysis AIM/Enduse AIM/Top-down AIM/Material Conclusion AIM, NIES

6. Production sector CO2 Rent Fossil fuel Electricity Produced commodities CO2 Foreign Recycle Pollution Pollution Man. sector Non-energy goods CO2 Trade Prod. sector market Energy Intermediate Env. Industry Env. investment Consumption Investment CO2 Env. capital Labor CO2 Energy Intermediate Consumption Government Capital Labor CO2 CO2 Household Government Energy Final cons. Household Production factor AIM/Top-down Energy Energy technology Energy service • Oil • Coal • Gas • Solar • Electricity etc. • Blast furnace • Power generation • Air conditioner • Boiler • Automobile etc. • Crude steel products • Sectoral GDP • Cooling demand • Lighting • Transportation etc. Energy consumption CO2 emissions Technology selection Energy service demands • Energy database • Energy type • Energy price • Energy constraints • CO2 emission factor • Technology database • Technology price • Energy consumption • Supplied service • amounts • Technology share • Lifetime • Socioeconomic scenario • Population growth • Economic growth • Industrial structure • Employment • Lifestyle Model analysis on CO2 reduction policy What’s AIM? CO2 reduction in Japan Model analysis AIM/Enduse AIM/Top-down AIM/Material Conclusion AIM/Material AIM/Enduse International price and trade Energy efficiency improvement Additional investment for energy saving AIM, NIES

7. Production sector CO2 Rent Fossil fuel Electricity Produced commodities CO2 Foreign Recycle Pollution Pollution Man. sector Non-energy goods CO2 Trade Prod. sector market Energy Intermediate Env. Industry Env. investment Consumption Investment CO2 Env. capital Labor CO2 Energy Intermediate Consumption Government Capital Labor CO2 CO2 Household Government Energy Final cons. Household Production factor AIM/Top-down Energy Energy technology Energy service • Oil • Coal • Gas • Solar • Electricity etc. • Blast furnace • Power generation • Air conditioner • Boiler • Automobile etc. • Crude steel products • Sectoral GDP • Cooling demand • Lighting • Transportation etc. Energy consumption CO2 emissions Technology selection Energy service demands • Energy database • Energy type • Energy price • Energy constraints • CO2 emission factor • Technology database • Technology price • Energy consumption • Supplied service • amounts • Technology share • Lifetime • Socioeconomic scenario • Population growth • Economic growth • Industrial structure • Employment • Lifestyle Model analysis on CO2 reduction policy-Bottom-up model approach- What’s AIM? CO2 reduction in Japan Model analysis AIM/Enduse AIM/Top-down AIM/Material Conclusion AIM/Material AIM/Enduse International price and trade Energy efficiency improvement Additional investment for energy saving AIM, NIES

8. Model analysis on CO2 reduction policy-Bottom-up model approach- Energy Energy technology Energy service What’s AIM? CO2 reduction in Japan Model analysis AIM/Enduse AIM/Top-down AIM/Material Conclusion • Oil • Coal • Gas • Solar • Electricity etc. • Blast furnace • Power generation • Air conditioner • Boiler • Automobile etc. • Crude steel products • Sectoral GDP • Cooling demand • Lighting • Transportation etc. Energy consumption CO2 emissions Technology selection Energy service demands • Energy database • Energy type • Energy price • Energy constraints • CO2 emission factor • Technology database • Technology price • Energy consumption • Supplied service • amounts • Technology share • Lifetime • Socioeconomic scenario • Population growth • Economic growth • Industrial structure • Employment • Lifestyle Structure of AIM/Enduse model AIM, NIES

9. Model analysis on CO2 reduction policy-Bottom-up model approach- Examples of socioeconomic scenarios What’s AIM? CO2 reduction in Japan Model analysis AIM/Enduse AIM/Top-down AIM/Material Conclusion AIM, NIES

10. Model analysis on CO2 reduction policy-Bottom-up model approach- What’s AIM? CO2 reduction in Japan Model analysis AIM/Enduse AIM/Top-down AIM/Material Conclusion Tech. fix Cheapest choice C-tax: 3,000 JPY/tC C-tax: 30,000 JPY/tC C-tax: 45,000 JPY/tC CO2 emissions trajectories by scenarios AIM, NIES

11. Marginal cost [\/tC] Marginal cost [\/tC] Expenditure for countermeasures Tax rate Amount of tax payment 45,000 JPY/tC Subsidy Tax rate Emissions Emissions 3,400 JPY/tC Target Present Target Present Marginal cost [\/tC] Emissions Target Present Model analysis on CO2 reduction policy-Bottom-up model approach- What’s AIM? CO2 reduction in Japan Model analysis AIM/Enduse AIM/Top-down AIM/Material Conclusion AIM, NIES

12. Model analysis on CO2 reduction policy-Bottom-up model approach- Carbon tax rate and required additional investments for reducing CO2 emissions in Japan What’s AIM? CO2 reduction in Japan Model analysis AIM/Enduse AIM/Top-down AIM/Material Conclusion bil. JPY / year AIM, NIES

13. Model analysis on CO2 reduction policy-Bottom-up model approach- Carbon tax rate and required additional investments for reducing CO2 emissions in Japan (continued) What’s AIM? CO2 reduction in Japan Model analysis AIM/Enduse AIM/Top-down AIM/Material Conclusion AIM, NIES

14. Production sector CO2 Rent Fossil fuel Electricity Produced commodities CO2 Foreign Recycle Pollution Pollution Man. sector Non-energy goods CO2 Trade Prod. sector market Energy Intermediate Env. Industry Env. investment Consumption Investment CO2 Env. capital Labor CO2 Energy Intermediate Consumption Government Capital Labor CO2 CO2 Household Government Energy Final cons. Household Production factor AIM/Top-down Energy Energy technology Energy service • Oil • Coal • Gas • Solar • Electricity etc. • Blast furnace • Power generation • Air conditioner • Boiler • Automobile etc. • Crude steel products • Sectoral GDP • Cooling demand • Lighting • Transportation etc. Energy consumption CO2 emissions Technology selection Energy service demands • Energy database • Energy type • Energy price • Energy constraints • CO2 emission factor • Technology database • Technology price • Energy consumption • Supplied service • amounts • Technology share • Lifetime • Socioeconomic scenario • Population growth • Economic growth • Industrial structure • Employment • Lifestyle Model analysis on CO2 reduction policy-Country top-down model approach- What’s AIM? CO2 reduction in Japan Model analysis AIM/Enduse AIM/Top-down AIM/Material Conclusion AIM/Material AIM/Enduse International price and trade Energy efficiency improvement Additional investment for energy saving AIM, NIES

15. Model analysis on CO2 reduction policy-Country top-down model approach- • Features of AIM/Material model • Model: Computable general equilibrium model • Country: Japan • Time period: 1995 to 2012 (recursive dynamic) • Activity: 41 sectors and 49 commodities • Solid waste: 18 waste types of industrial waste and 8 types of municipal waste. • In this analysis, the constraint on solid waste is not taken into account. • Other features • Both economic balance and material balance are kept. • Energy efficiency improvement is given from solution of AIM/End-use model • Scenarios: • Reference Case: Without CO2 constraints. • Tax case: CO2 reduction by only introducing carbon tax. • Tax + subsidy case: CO2 reduction by introducing carbon tax with subsidy for energy saving equipment. What’s AIM? CO2 reduction in Japan Model analysis AIM/Enduse AIM/Top-down AIM/Material Conclusion AIM, NIES

16. Model analysis on CO2 reduction policy-Country top-down model approach- produced commodity What’s AIM? CO2 reduction in Japan Model analysis AIM/Enduse AIM/Top-down AIM/Material Conclusion abroad pollution management recycle pollution import export CO2 production sector market energy intermediate CO2 environmental industry/ investment env. capital labor energy intermediate CO2 capital labor household government energy final demand Structure of AIM/Material AIM, NIES

17. Model analysis on CO2 reduction policy-Country top-down model approach- Sectors and commodities What’s AIM? CO2 reduction in Japan Model analysis AIM/Enduse AIM/Top-down AIM/Material Conclusion AIM, NIES

18. Model analysis on CO2 reduction policy-Country top-down model approach- What’s AIM? CO2 reduction in Japan Model analysis AIM/Enduse AIM/Top-down AIM/Material Conclusion GDP change compared to the reference case AIM, NIES

19. Model analysis on CO2 reduction policy-Country top-down model approach- What’s AIM? CO2 reduction in Japan Model analysis AIM/Enduse AIM/Top-down AIM/Material Conclusion Activity Change of each sector in the first commitment period (compared to reference case) AIM, NIES

20. Conclusion • In Japan, even existing or practical technologies can reduce the CO2 emissions to the Kyoto Target. The necessary carbon tax rate will be 45,000 yen/tC. • When the tax revenue is utilized for subsidy, the carbon tax rate will be 3,400 yen/tC. In this case, the GDP loss will be 0.061% comparing to reference case. • Although activities of thermal power generation and fossil fuel production sectors will decrease severely by introducing carbon tax, energy intensive industries such as steel, paper etc. will not be damaged so much. • Because of the subsidy for energy saving devices, production and employment in the manufacture of the energy saving devices will increase. What’s AIM? CO2 reduction in Japan Model analysis AIM/Enduse AIM/Top-down AIM/Material Conclusion AIM, NIES

21. Criticism against simulation results from Industries • Japanese economy will suffer the severe damage from the carbon tax? • Validity of assumptions: if the carbon tax is introduced in Japan, many manufacturing factories will move out of Japan to avoid the carbon tax payment. • Activities of Japanese industries, especially energy intensive industries, in the international market will degrade when the carbon tax is introduced? • Subsidy is not a good policy option. • How to select the appropriate countermeasures? • Transaction cost of carbon tax and subsidy policy will become very high. • Subsidy to countermeasures to reduce the CO2 emissions can be compensated for other tax such as the consumption tax? • When subsidy is introduced, the more large scale devices will be consumed (rebound effect)? • Some criticisms are for policy making itself, and some are qualitative. What’s AIM? CO2 reduction in Japan Model analysis AIM/Enduse AIM/Top-down AIM/Material Conclusion AIM, NIES

22. For more practical simulation • Relationship between existing energy tax and proposed carbon tax • Tax cut for the sectors suffering from carbon tax (steel etc.) • Policy mix -Combination of carbon tax, regulation, voluntary plan, ... • Kyoto Mechanism • Revision of assumptions: • Economy in Japan will recover rapidly. • Time until 1st commitment period becomes shorter. What’s AIM? CO2 reduction in Japan Model analysis AIM/Enduse AIM/Top-down AIM/Material Conclusion AIM, NIES