Presented by Belay Fekadu, Farzad Taheripour, Patrick Georges, David Mayer-Foulkes, Marianne

Aasen, Hyun-Sik Chung, Kenatro Katsumata, Christa Clapp

GTAP_E

2

Presentation Outline

3

Annex 1 without USA

4

Emissions targets

5

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

6

Energy Substitution PossibilitiesCapital-Energy subproduct subproduct

Electrical

Capital Energy subproduct

KE

EN

Non-electrical

Coal

NEL

Gas

NCOAL

Petroleum productsOil

Non-coal

7

Energy Substitution Possibilities

  RCTAX gco2t

  base exp base exp

USA 76.5 49.9 -26.3 -25.4

EU 76.6 50.0 -14.3 -13.2

EEFSU 75.1 49.2 -26.6 -30.0

JPN 76.6 50.0 -15.5 -14.4

RoA1 76.8 50.1 -21.0 -21.1

EEx 0.0 0.0 2.7 4.1

CHIND 0.0 0.0 1.1 2.7

RoW 0.0 0.0 3.6 4.9

• 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

Carbon Permit Price & Carbon emissions

8

Energy Substitution PossibilitiesCAPENDEMAND: qf(i,j,r)

  USA EU EEFSU JPN RoA1 EEx CHIND RoW

base capital -1.6 0.0 -8.4 -0.3 -0.3 2.9 1.1 1.6

energy -13.1 -5.4 -25.8 -5.0 -8.8 4.3 2.1 2.9

exp capital 18.0 11.3 55.4 10.2 15.4 -0.1 -2.3 -1.9

energy -47.4 -19.2 -56.2 -17.5 -33.9 11.6 6.3 9.2

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

9

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

WELFARE

  1 co2trd 2 alloc_A1 3 endw_B1 4 tech_C1 5 pop_D1 6 tot_E1 7 IS_F1 8 pref_G1 Total

base

USA -10710 -12960 0 0 0 4959 64 0 -18646

EU -5691 -15167 0 0 0 5256 -153 0 -15756

EEFSU 23306 -4834 0 0 0 2097 109 0 20678

JPN -4208 -7140 0 0 0 3083 -147 0 -8412

RoA1 -2915 -5454 0 0 0 -2588 77 0 -10879

EEx 0 -539 0 0 0 -14952 -27 0 -15519

CHIND 0 660 0 0 0 -27 -20 0 612

RoW 0 1194 0 0 0 2072 96 0 3362

Total -218 -44239 0 0 0 -101 -1 0 -44560

exp

USA -7652 -8384 0 0 0 5471 375 0 -10190

EU -4215 -14863 0 0 0 5070 -272 0 -14280

EEFSU 16551 -4460 0 0 0 1396 167 0 13654

JPN -2931 -7278 0 0 0 3241 -298 0 -7266

RoA1 -1887 -5146 0 0 0 -2735 -6 0 -9774

EEx 0 -140 0 0 0 -14324 -34 0 -14498

CHIND 0 1069 0 0 0 0 -31 0 1038

RoW 0 1613 0 0 0 1792 97 0 3502

Total -134 -37588 0 0 0 -90 -2 0 -37814

10

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

11

Tax Replacement Implications

12

• Complex interactions between energy, emissions & economy

• Policy choices & design have economic implications:– Choice of environmental policy instrument (carbon tax vs. carbon

emission quotas) impacts welfare, terms of trad

– Level of emission quotas and allocation (historical emissions, emissions/output, emissions/capita) impact welfare

– Participation in climate treaties (U.S., developing countries) impacts emissions and trade leakage, i.e. movement of energy-intensive industries towards regions that are outside of the carbon quota area

• Technology (energy-efficiency, capital turnover) has economic implications:– Capital-Energy substitution impacts production choices (either towards

energy or towards capital), carbon permit prices, welfare

Concluding Comments