Modeling climate mitigation and economic growth in relation to employment and skills in South Africa

Jules Schers, CIRED / ENPC / AgroParisTech

Co-Authors: Frédéric Ghersi and Franck Lecocq

Supported by: AFD, SMASH, and the Chair of prospective modelling for sustainable development at ENPC

International Energy Workshop Cork, Friday 3 June 2016

Content

Why a "CGE" exploration of energy & labour?

Modelling Objectives

A not-so-short presentation of IMACLIM-SA

Drivers of growth & reference projection

Scenarios for CO2 tax revenue recycling

Approach to modelling labour by skill in a CGE

Results by level of skill

Work-in-progress & Conclusion

2 / 22

Why a "CGE" exploration of energy & labour?

3 / 22

High hopes (new economic activity) and big fears

(unemployment) around "greening" and growth

Big issue for South Africa with unemployment at 25%

(officially) to 39% ("broad")

Usually analyses focus on direct and indirect employment

effects: Renewables & Efficiency vs. Fossil Fuel use and supply

but… Debate asks for analysis of macro-economic feedbacks

on employment (in all industries)

Modelling objectives: capturing constaints

Understand implications of carbon tax-driven climate

mitigation for economic development of South Africa

Capture constraint of electricity infrastructure "lock-in"…

… and other second-best features = non-energy constraints

on economic development:

Labour market has significant impact on economic cost of an

energy transition (Guivarch et al, 2011)*

Relevant for South Africa: very high unemployment among

non- & low educated labour, but shortage of high educated

4 / 22 * Guivarch, C., R. Crassous, O. Sassi, and S. Hallegatte (2011). The costs of climate policies in a second-best world with labour market imperfections. Climate Policy, vol.11:1, pp.768-788

Characteristics of IMACLIM-SA

Open economy, hybrid “CGE”, in a 1-step projection from 2005 to 2035 calibrated on “hybrid” data:

10 Products/sectors, of which 5 energy

5 Household classes

Second-best features:

No foresight, non-linear simulation (not optimisation)

Fixed (agent-specific) mark-up prices

Rigid real wages: CPI indexed wages in a wage curve

ELC sector (production) technology is BU-informed Leontief

5 / 22

Hybridisation

6 / 22

Cost structure domestic production

7 / 22

Cost structure per unit of output

λ_ls1 λ_ls2

κ_1 κ_2

α_11 α_12

α_21 α_22

λ_hs1

λ_ms1

λ_hs2

λ_ms2

Energy Sector (1) Non-energy sector (2)

L Medium-skill (ms)

L High-skill (hs)

Non-energy sector (2)

Energy Sector (1)

K (CFC)

L Low-skill (ls)

Nested CES KLEM production function

8 / 22

Y

KLE MatCOA

GASE KL

OIL

REF L1 KL23

KL3 L2ELC

MAN

EIN

LSS

HSS

Constant Elasticity of Substitution (CES)

Fixed production coefficients (Leontief)

K L3

TRA

Electricity sector based on SA TIMES model

Technical coefficients for inputs to electricity based on

outcomes of the South Africa TIMES model of the ERC of

Univ. of Cape Town*

PJ fuel per PJ of ELC

Units of capital per PJ of ELC

Assumptions to link O&M costs to input of labour and volume

of goods&services (non-energy) per PJ of ELC

SATIM simulations include SA’s Integrated Resource Plan

(updated) + R100 and R300 CO2 tax levels * Thanks to the support of the Energy Research Centre (ERC) of the University of Cape Town. For more info on SATIM, see: ERC. 2013. Assumptions and Methodologies in the South African TIMES (SATIM) Energy Model. Version 2.1, 2013/04/08. Systems Analysis & Planning Group, Energy Research Centre, University of Cape Town, Cape Town

Nested CES consumption function

10 / 22

U

COMP EAG

REF(above basic need)

ELC(above basic need)

EIN MAT LSS HSSTRA(above basic need)

11 / 22

Quantities

L_ls1 L_ls2

K_1 K_2

L_hs1 L_hs2

L_ms1 L_ms2

IC_11 IC_12

IC_21 IC_22

X_1

X_2

Energy Sector (1) Non-energy sector (2)

Y_1 Y_2

R_1 R_2

Exports

M_1 M_2

Total Uses

U_1

U_2

FC_1

FC_2

Final Consumption Gov.

G_1

G_2

Investm.

I_1

I_2

L Medium-skill (ms)

L High-skill (hs)

Total Resource (R)

Imports (M)

Dom. Prod. (Y)

Non-energy sector (2)

Energy Sector (1)

K (CFC)

L Low-skill (ls)

Internat. trade-

offs

12 / 22

Values … and… Income and Expenditure by Agent

CFC_1 CFC_2

RV_1 RV_2

NOS_1 NOS_2

TY_1 TY_2

SAL_hs1 SAL_hs2

SAL_ms1 SAL_ms2

SAL_ls1 SAL_ls2

Energy Sector (1) Non-energy sector (2)

TC_1 TC_2

IV_11 IV_12

IV_21 IV_22

MV_1 MV_2

Rest o/t World (ROW)

XV_1

Firms (S)

PC_hs

PC_ms

PC_ls

PI_G

Wage_hs

Wage_ms

Wage_ls

Total Uses

UV_1

UV_2

Households (H) Government (G)

GV_2

FV_1

FV_2

Trade Balance

XV_2

GOS_H GOS_G GOS_S

TY_G

SoCo_hs

SoCo_ms

SoCo_ls

Total FC_H Total FC_G Total IV_G

VA_1 VA_2 PI_H

L Medium-skill (ms)

L High-skill (hs)

PI_STotal Factor (VA) / Primary (PI) income

Investment

IV_2

Total Resource (R)

Imports (M)

Dom. Prod. (Y)

Non-energy sector (2)

Energy Sector (1)

Transport & Commerce margins

Taxes on Prod (TY)

Net Profits (NOS)

K (CFC)

L Low-skill (ls)

Inco

me

Dist

ribut

ion,

Ta

xes

and

othe

r tra

nsfe

rs

Pric

es,

cost

s,m

argi

ns,

and

taxe

s

13 / 22

… and… Income and Expenditure by Agent

Rest o/t World (ROW)

Firms (S)

PC_hs

PC_ms

PC_ls

PI_G

Wage_hs

Wage_ms

Wage_ls

Households (H) Government (G)

Trade Balance

GOS_H GOS_G GOS_S

TY_G

SoCo_hs

SoCo_ms

SoCo_ls

Total FC_H Total FC_G Total IV

GDI_H GDI_G GDI_S

SFC_H SFC_G

PI_H

GDI_H

L Medium-skill (ms)

L High-skill (hs)

SFC_S

BUD_H BUD_G BUD_S

GFCF_H GFCF_G GFCF_S

SFC_ROW

PI_S

Transfers (taxes, interest, benefits, other)

Total Factor (VA) / Primary (PI) income

D_ROW D_H D_G D_S

Investment

Total GFCF

Total Resource (R)

Imports (M)

BUD_ROW

Transport & Commerce margins

Transfers

Gross Disposable Income (GDI)

Net Saving or Borrowing (SFC)

Total Budget (BUD)

Gross Fixed Capital Formation (GFCF)

Taxes on Prod (TY)

Net Profits (NOS)

K (CFC)

L Low-skill (ls)

Inco

me

Dist

ribut

ion,

Ta

xes

and

othe

r tra

nsfe

rs

Labour market with equilibrium unemployment

Imperfect labour markets through wage curve with wages fixed to consumer price index (CPI) and Labour Productivity (LP) gains :

𝑤𝑤𝑤𝑤𝑠1 − 𝑠𝑠𝑤𝑠𝑤𝐿𝐿𝐿𝐿𝐿𝐿,𝑠 ∗ 𝐶𝐶𝐶 + 𝑠𝑠𝑤𝑠𝑤𝐿𝐿𝐿𝐿𝐿𝐿,𝑠 ∗ 𝐿𝐶𝑠𝐿𝐿_𝑤𝑤𝑔𝑔𝑠 ∗ 𝐶𝐶𝐶)

= 𝑤𝑤𝑤𝑤𝑠,0 ∗𝑤𝑤𝑤𝑤𝑠,0

𝑤𝑤𝑤𝑤𝑠,𝑡

𝜎𝑤𝑤

14 / 22

Drivers of Growth & Reference Projection (RP)

No damage function for impacts of climate change

Productivity increase:

Capital: +2.0% /yr

Labour (all skill levels): +1.0% /yr

Materials & Services: +0.25%/yr

Trend in volume of exports: +1.5%/yr

Outcomes: GDP/cap Index

Broad Unempl.

CO2 emis. Index

High/Low inc. ratio

Base Year (BY, 2005) 100 39% 100 42

Ref. Proj. (RP, 2035) 216 29% 181 41

15 / 22

Scenarios for CO2 tax revenue recycling

Basic approach of CO2 tax (Ctax) scenarios:

Ctax levels: 100 and 300 ZAR2005/tCO2 (18 and 55 USD2012/tCO2) applied to direct emissions of energy consumption

No border tax adjustment, no Ctax export rebates, No foreign or international Ctax

Ctax Revenue Recycling schemes:

1. Reduce public deficit

2. Reduction of sales tax on final consumption

3. Reduce income and revenue taxes of companies & households

4. Increase government expenditure

5. Lumpsum transfer to all households

16 / 22

Results of CO2 tax scenarios

Double dividend for Ctax 100 ZAR2005/tCO2 + Sales tax reduction

GDP/cap. (BY = 100)

Broad Unempl.

CO2 emis. vs. Ref. Proj.

High/Low inc. ratio

Reference Projection 216 29% - 41

Ctax 100 + recycling

Deficit reduction 200 33% -25% 41

Sales Tax reduction 218 25% -20% 41

Income Tax reduction 201 31% -24% 42

Higher Gov. Expenses 205 28% -23% 40

Lumpsum transfer 201 32% -24% 30

Ctax 300 + recycling

Sales tax reduction 209 26% -42% 41

17 / 22

Approach to modelling labour segmented by skill

Common approach: Skill of labour ≈ Worker’s education level Future educational attainment based on a conservative estimate versus

IIASA projections for South Africa (K.C. et al., 2013)*

Initially, using "common" approach, we project more high skill (28%) than low skill (21%) unemployment in 2035 Due to an increase / decrease of their share in labour force Results obtained with strong complementarity between capital and

high-skill labour

We need to reconsider the dynamics of supply and demand of labour by level of skill

* K.C., S., et al. 2013. Summary of Data, Assumptions and Methods for New Wittgenstein Centre for Demography and Global Human Capital (WIC) Population Projections by Age, Sex and Level of Education for 195 Countries to 2100. IIASA, Laxenbourg 18 / 22

Dynamics of skill-segmented labour in a CGE

1. Definition: What is labour by level of skill? Level of skill of the worker, e.g. the level of education: Constant Educational

Attainment definition (CEA)

Characteristic of a job type in production, regardless of labour supply (positional): Constant Shares of Labour Force definition (CSLF)

A combination? Supply of high-skilled labour goes up with degree, but requirements for jobs go up too: Upgraded Qualifications definition (UQ)

2. What are the drivers for change of skill-intensity of production: Changing productivity Relative factor prices Other drivers?

3. What is consumption’s role in demand for skills: Are high-skill intensive goods in higher demand when people get richer? Do they have a higher income-elasticity than other goods?

19 / 22

Results by level of skill

We now obtain a sharp decrease of unemployment for high skill

High skill labour also relatively benefitting most from revenue

recycling through sales tax reduction.

What if one partly recycles Ctax revenue into investing in skills?

Result: if productivity effect is bigger than +1% annual productivity

growth, then GDP/capita grows stronger than emissions, but only

benefiting high skill labour

20 / 22

Work in progress

Relative CPI Real Effective Exchange Rate which impacts the

comparability of IMACLIM-SA and SATIM runs’ price & cost

trajectories

Other parametrisation issues: big trade balance surpluss and

questions around solving the capital market

Differentiation in productivity developments by sector (and skill)

Diffferentiation in developments in international prices, e.g.

energy vs. non-energy

21 / 22

Conclusion

South Africa can achieve its economic, social and environmental

objectives through recycling of carbon tax revenue, likely by

reducing VAT + additionall equity measures

South Africa’s INDC can be achieved with a CO2 tax of around

ZAR2005 300/tCO2 (USD2012 55) by 2035

To assess economic growth and employment by level of skill in a

CGE setting we need an approach beyond "degree = skill"

CO2 tax revenue recycling through investment in skill of labour

need a tailored approach in order to reduce inequality. 22 / 22

Thank you for your attention!

Jules Schers CIRED, France

schers | at | centre-cired.fr

Schers, J., F. Ghersi, F. Lecocq, F. Grazi (ed). 2015. Green Growth and its Implications for Public Policy – The Case of South Africa. Etudes de l’AFD, no.4. Agence Française de Développement (AFD). Paris, December 2015. (and a shorter working paper following soon)