E-Modeling

1
E-Modeling

• By Energy Group
• Advisors
• Mark Gehlhar
• Thomas Hertel
• and
• Robert McDouglas

2
Introduction and Motivation

• - Modeling 3Es Trade Linkages is an important
  objective in applied economic policy analysis.
• - GTAP-E model (extended version of GTAP) is
  used to implement this approach.
• - The policy relevance of GTAP-E is
  illustrated by alternative Simulations of the
  implementation of the Kyoto Protocol.

3
Experiments

• Base Experiments
• - KP without emission trading and fixed trade
  balance
• - KP with Annex1 emission trading
• - KP with worldwide emission trading
• Extended Experiments
• - Exp1 USA excluded from KP
• - Exp2 Deviations from the Kyoto protocol
• - Exp3 Increase in Elasticity of Substitution
  Between Coal and non-Coal (ELCO)
• - Exp4 Different Elasticities of Substitution
  between Capital and Energy

4

Marginal Costs of Achieving the Kyoto Targets with and without Using the Flexibility Mechanisms
Kyoto with No Use of the Marginal Costs Kyoto with No Use of the Marginal Costs Kyoto with Emission Trading Kyoto with Emission Trading Kyoto with Worldwide Marginal Costs Kyoto with Worldwide Marginal Costs
Reduction of Emissions (1997 USD per Ton of Carbon) Reduction of Emissions (1997 USD per Ton of Carbon) Reduction of Emissions (1997 USD per Ton of Carbon)
USA -36 126 -27 78 -13 30
EU -22 147 -14 78 -6 30
EEFSU 4 0 -27 76 -13 30
JPN -32 233 -15 78 -6 30
RoA1 -36 178 -21 78 -9 30
EEx 3 0 2 0 -7 30
CHIND -1 0 -1 0 -32 29
RoW 4 0 4 0 -9 30
Annex1 -24 -22 -10
Non-Annex 2 1 -19

5

• Results
• Scenario 1(Kyoto with No Use of the Marginal
  Costs)
• Emission reductions range from 20 to 40.
• Carbon Leakage Emissions are
  reduced in Annex Countries but increases in other
  countries like EEFSU
• The marginal abatement costs range from 126USD in
  the US to 233USD in Japan.
• Note Marginal cost in US are lower than in other
  Annex1 countries despite the higher reduction
  rate US uses relatively more coal
  and taxes energy less heavily.
• Scenario 2 (Kyoto with Emission Trading)
• A substantial reduction of the marginal abatement
  costs from around 150 USD in the no-trade case to
  78 USD in this case.
• It implies that the burden of the reduction
  shifts away from oil products in the relatively
  carbon-efficient economies towards coal in the
  Former Soviet Union.
• EEFSU sells carbon permits to other annex
  countries, of which larger share is purchased by
  USA.
• Scenario 3 (Kyoto with Worldwide Marginal Costs)
• The world marginal abatement cost does not exceed
  30 USD per ton of carbon.
• The Annex1 countries account for less than half
  of the world reductions.
• China-India gains a lot. It is the biggest seller
  of carbon permits, while US is the largest buyer.

Implies
Because
6
Macroeconomic Impact of Implementing the Kyoto Protocol Percentage change in welfare and TOT Macroeconomic Impact of Implementing the Kyoto Protocol Percentage change in welfare and TOT Macroeconomic Impact of Implementing the Kyoto Protocol Percentage change in welfare and TOT Macroeconomic Impact of Implementing the Kyoto Protocol Percentage change in welfare and TOT Macroeconomic Impact of Implementing the Kyoto Protocol Percentage change in welfare and TOT Macroeconomic Impact of Implementing the Kyoto Protocol Percentage change in welfare and TOT Macroeconomic Impact of Implementing the Kyoto Protocol Percentage change in welfare and TOT
  Kyoto with no use of the Flexibility Mechanism Kyoto with no use of the Flexibility Mechanism Kyoto with ET among Annex1 Kyoto with ET among Annex1 Kyoto with Worldwide Emission Trading Kyoto with Worldwide Emission Trading
  Utility TOT Utility TOT Utility TOT
USA -0.25 0.96 -0.26 0.54 -0.16 0.18
EU -0.48 0.33 -0.27 0.2 -0.06 0.12
EEFSU -0.41 -0.87 2.75 0.92 0.66 0.05
JPN -0.61 1.34 -0.27 0.66 -0.07 0.43
RoA1 -1.3 -0.65 -0.86 -0.56 -0.42 -0.4
EEx -1 -3.02 -0.73 -2.19 -0.53 -1.47
CHIND 0.08 0.03 0.05 -0.01 0.44 0.8
RoW 0.16 0.26 0.13 0.22 0.1 0.32
7

• Experiment 1
• Net energy exporters A1 economies experience
  higher cost the degradation of
  the terms of trade.
• EEFSU loss is due to the fall of the energy
  exports value.

Because of
8
Experiment No2 A reduction in the losses in all
A1 countries and a generation of substantial
gains in the EEFSU region
the emission trading among A1 countries.
Because of
9

• Experiment No 3
• A reduction in the economic costs for A1
  countries and energy exporters and a net gain in
  China and India and the EEFSU region
  the worldwide emission trading system.

Because of
10

• Extended Experiment No 1
• USA excluded from Kyoto Protocol

Why do this?

• US decided to withdraw from Kyoto Protocol in
  March 2001.
• Excluding US from the Annex 1 countries is more
  realistic.
• The results of this simulation might have major
  policy implications.

How did we do this?
Modifications in KYONOTR (Kyoto without
emissions trading and fixed trade
balance) Closure ?!swap gco2t("USA")RCTAX("USA"
) (Growth of Emissions by USA is endogenous,
taxes being exogenous) Shocks ?!Shock
gco2t("USA") -35.6 Other two experiments
Attempted, but without results!
11
Results An Overview
U EV tot
USA 0.01 419 0.04
EU -0.58 -40771 0.21
EEFSU -0.28 -2124 -0.51
JPN -0.66 -23946 0.94
RoA1 -1.09 -14558 -0.06
EEx -0.44 -9351 -1.30
CHIND 0.00 22 -0.11
RoW 0.04 983 0.04
Overall losers EU, JPN, RoA1, EEx, EEFSU Overall
Gainers USA, RoW. ToT US, EU, JPN, and RoW
gain, while EEFSU, RoA1, EEx and CHIND lose.
12
Welfare Decomposition
Huge Allocative efficiency Losses in most
regions ToT US, EU, JPN, and RoW gain, while
EEFSU, RoA1, EEx and CHIND lose.
13
Further Decomposition of Allocative Efficiency
Inferences Almost no change in agriculture and
oil. Fall in most countries for coal, gas, oil
products, electricity, energy-intensive Industries
and others. Extensive fall in AE has outweighed
uniform rise in ToT! US has not suffered from any
AE loss, rather it has gained in oil products!
14
Decomposition of ToT Changes
Inferences All import prices have increased and
all export prices have increased, except in EEx,
EEFSU. RoA1, CHIND have higher rise in import
prices than in export prices Why????
15
Further Decomposition of Price Changes
Inferences Remarkable increases in the prices
of electricity, energy-intensive products, in
major Annex-1 countries (except US, EEFSU) and
fall in oil, oil products, gas. Most prices have
fallen for the rest. Similar trends for both
import and export prices. This explains the ToT
changes.
16
Change in Emissions and Fuel Prices
Inferences Fall in Emissions, due to all fuels,
is exogenous for non-US Annex-1 countries, while
it has risen for USA, EEFSU, EEx RoW. This is a
result of huge rise of emission taxes in EU,JPN
and R0A1(135,220 and 170, respectively!) Prices
of all fuels, especially, coal and gas, have
risen in all non-US Annex1 regions, while they
have marginally fallen in others, explaining the
trends in emissions.
17
Inferences from This Experiment

• US gains little (in terms of welfare) by not
  ratifying Kyoto Protocol,
• even when there is no flexibility!
• EU, Japan, the rest of Annex-I, Energy-exporting
  countries and EEFSU lose a lot in this case.
• This is due to loss in allocative efficiency in
  most countries for coal, gas, oil products,
  electricity, energy-intensive Industries and
  others.
• ToT US, EU, JPN, and RoW gain, while EEFSU,
  RoA1, EEx and CHIND lose ? AE loss in non-US
  regions outweighs ToT gain!
• ToT changes are well-explained by relative
  prices of imports and exports of various regions
  in different sectors.
• Prices of all fuels, especially, coal and gas,
  have risen in all non-US Annex1 regions, while
  they have marginally fallen in others, explaining
  the rise in emissions in non-Annex1 countries.

18
Extended Experiment No 2Deviations from the
Kyoto protocol
Committed towards Kyoto (K) The Annex 1
countries reduce carbon emissions by 5 percent
upto 2012 relative to their 1990 level emissions
under the no trade case. Deviation1 (K_1/2)
The Annex 1 countries aim for only one half of
the committed reductions under the no trade
case. Deviation (K_1/5) The Annex 1 countries
aim for only one fifth of the committed
reductions under the no trade case.
Variable name- gco2t growth of emissions by
region (region specific)Committed reduction in
growth rates under different scenarios
Region K K_1/2 K_1/5
USA 35.6 17.8 7.1
European union 22.4 11.2 4.9
Japan 31.8 15.9 6.7
Other Annex1 countries 35.7 17.9 7.1
19
(No Transcript)
20
Observations/ Interpretations

• The allocative efficiency effect drives the
  regional welfare as compared to the terms of
  trade effect in all Annex 1 countries under both
  the scenarios, except for EEFSU where the tot
  effect dominates .
• USA specific observations
• Allocative efficiency improves under scenario
  K_1/5 as compared to the fully committed
  scenario, though still negative.
• Input and consumption taxes are major
  contributors to the allocative inefficiency
  under both the scenario.
• Further, input taxes on firm consumption of
  domestically produced coal used by the
  electricity sectors and oil products, namely
  petroleum and coal products, are the main
  elements that witness the change under the two
  scenario.
• Lowering of carbon taxes in USA improves
  allocative efficiency, but not so in EU.

21
EXTENDED EXPERIMENT NO 3Increase in Elasticity
of Substitution Between Coal and non-Coal (ELCO)

• VERSION KYOTO WITH ANNEX 1 EMISSIONS TRADING
• Why do this?
• As coal is more carbon-emitting, we examine the
  case of higher substitution elasticity of coal by
  other non-coal energy inputs.
• How did we do this?
• We edit the parameter file of the base model of
  the experiment named KYOTO WITH ANNEX 1
  EMISSIONS TRADING.
• The initial ELCO between coal and non-coal was
  0.5. We change it to 1.5 for all regions.

22
(No Transcript)
23
(No Transcript)
24
(No Transcript)
25
(No Transcript)
26
Reduction in RCTax Reduction in RCTax Reduction in RCTax
RCTAX Sub0.5 Sub1.5
USA 66.84 77.91
EU 66.82 77.9
EEFSU 65.66 76.37
JPN 66.87 77.98
RoA1 67.12 78.3
27
Before Simulation Before Simulation Before Simulation Before Simulation Before Simulation Before Simulation Before Simulation Before Simulation Before Simulation
qdem USA EU EEFSU JPN RoA1 EEx CHIND RoW
Coal -40.11 -34.99 -41.74 -33.2 -38.7 2.49 0.74 3.8
Oil -16.57 -2.86 -8.79 -7.67 -7.83 2.22 2.64 2.78
Gas -23.4 -17.37 -21.28 -19.2 -26.8 0.28 -0.29 1.69
Oil Products -17.48 -3 -11.1 -6.45 -8.36 2.89 2.51 3.45
Electricity -4.99 -4.15 -17.64 -1.23 -2.04 0.82 -0.05 0.26
After Simulation After Simulation After Simulation After Simulation After Simulation After Simulation After Simulation After Simulation After Simulation
qdem USA EU EEFSU JPN RoA1 EEx CHIND RoW
Coal -46.74 -44.23 -52.8 -45.5 -43.4 2.67 0.25 3.54
Oil -14.26 -1.5 -5.76 -4.92 -6.38 1.8 2.24 2.27
Gas -13.68 -11.84 -14.09 -11 -19.5 0.21 0.19 1.33
Oil_Pcts -15.05 -2.51 -7.89 -5.15 -7.2 2.32 2.11 2.78
Electricity -3.95 -3.17 -14.75 -0.9 -1.56 0.63 -0.01 0.27
28
Observations of this Experiment

• Emission of CO2 has fallen to a significant
  extent.
• Derived demand for coal has fallen in all the
  regions.
• Price of Coal has come down in all the regions.
• We observe reduction in the percentage change of
  demand for coal and increase in the percentage
  change of demand for all other energy inputs
  (viz. oil, gas electricity).
• Cost share of coal in total cost for all the
  industries has been reduced.
• The most interesting result in regarding
  imposition of carbon emissions tax (RCTAX).
• As coal is being substituted by non-coal inputs
  which are emitting less CO2, lesser intervention
  is now required in terms of RCTAX.
• We end up by analyzing the welfare effect of the
  changes we make.

29
Extended Experiment No4 Sensitivity of Capital
Energy Substitution Parameter (ELKE)

• In GTAP-E substitution parameter 0.5
• Green argues that it can range between 0.0 for
  old capital and 0.8 for new capital
• Analyse the effect of changing this parameter
  between the two extremes
• Welfare effect ranges between
• - ELKE 0.0 US -168996
• - ELKE 0.8 US -97488
• Variation is predominantly due to changes in
  allocative efficiency, as tot are relatively
  unaffected by changes in ELKE

30

• Why does welfare fall as substitution parameter
  becomes more inelastic?
• Inability to switch away from energy towards
  capital results in a greater carbon tax required
  to reduce energy use to Kyoto levels.
• Less optimal uptake of energy as firms substitute
  more towards less carbon intensive fuels then
  when the substitution parameter is more elastic

• United States Welfare has significantly more
  variation then Europe

Welfare Change US million ELKE 0.8 ELKE 0.1
USA -11975 -31105
Europe -47874 -44250
31
Why does Europes Welfare fall as ELKE
substitution parameter falls?
This is due to an improvement in the allocative
efficiency of refined oil use in energy
intensive sector and other industries and
services sector.
Welfare change of Refined Oil Use in Other Industries and Services Sector Welfare change of Refined Oil Use in Other Industries and Services Sector Welfare change of Refined Oil Use in Other Industries and Services Sector Welfare change of Refined Oil Use in Other Industries and Services Sector Welfare change of Refined Oil Use in Other Industries and Services Sector
welcnt vol taxrateb taxrateu
EU elke 0.0 2999.9 1120.3 247 372.5
EU elke 0.8 -8197.8 -3078.8 247.6 304.3
Total Welfare Change 11197.7
USA elke 0.0 -6631.5 -10800.8 0 144.6
USA elke 0.8 -3409 -17661 0 44.4
Total Welfare Change -3222.5

32
Conclusions

• World wide emission-trading system increases the
  welfare world wide (according to GTAP paper).
• Non-ratification of KP by USA has negative
  welfare consequences for the other regions,
  especially, non-US Annex-1 countries.
• When the countries deviate from their KP
  commitments, the allocative efficiency effect
  drives the regional welfare as compared to the
  terms of trade effect in all Annex 1 countries,
  except for EEFSU where the tot effect dominates.
• With a high elasticity of substitution between
  coal and non-coal, lesser intervention is
  required in terms of RCTAX.
• Welfare falls as substitution elasticity between
  capital and energy falls, as inability to switch
  away from energy towards capital results in a
  greater carbon tax required to reduce energy use
  to Kyoto levels.
• Less optimal uptake of energy as firms substitute
  more towards less carbon intensive fuels than
  when the K-E substitution parameter is more
  elastic