An E3 Econometric Analysis of CDM and Technology Transfer between Japan and China

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An E3 Econometric Analysis of CDM and Technology
Transfer between Japan and China
International Energy Workshop 2005, Kyoto, Japan,
July 5 2005

• Mitsuo YAMADA
• ECS/IIASA, Schlossplatz 1, A-2361 Laxenburg,
  Austria
• (Chukyo Univ., Nagoya, Japan)
• yamada_at_iiasa.ac.at
• yamada_at_mecl.chukyo-u.ac.jp

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Contents

• 1 Introduction
• 2 Methodology
• 3 Features of the model
• 4 Some simulation results
• 5 Concluding remarks

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1 Introduction

• Background and motivation
• China is trying to attain the conflicting
  objectives of economic development and global
  environmental improvement, although it is not
  obliged to reduce GHG emissions under the Kyoto
  Protocol.
• Japan has already built an energy-efficient
  society and complying with the Kyoto Protocol
  only with domestic efforts seems difficult. So,
  the usage of flexible mechanisms is attractive to
  Japan.
• We develop an economy-energy-environment (E3)
  econometric model of China and Japan, both linked
  through international trade.
• Using this model we analyze the effect of
  technology transfer between China and Japan,
  considering the Clean Development Mechanism
  (CDM), and a carbon tax option.

4
Figure 1 GDP and its Growth in China and Japan
5
Figure 2 Primary Energy Supply and Energy
Intensity of GDP in China and Japan
6
Figure 3 Total CO2 Emissions and Carbon
Intensity of PES in China and Japan
7
Kaya Identity
Figure 4 Simple Prediction

• High growth requires faster improvement in energy
  efficiency.

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Issues for China

• What sector improved in energy efficiency?
• Final consumption of energy for Industry,
  Transport, and Residential/Commercial
• Change in the industrial structure
• Diffusion of energy-efficient commodities
• Electricity Generation Sector
• Fuel shift from coal to natural gas
• Fuel efficiency improvement
• How attained?
• Clean Development Mechanism (CDM)
• Government-based cooperative activities
• Technology transfer through Foreign Direct
  Investment (FDI)

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Figure 5 Emissions of Greenhouse Gases in Japan
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Table 1 Emission Targets of Greenhouse Gases in
Japan
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Issues for Japan

• Further improvement of energy efficiency
• 12 reduction in GHG emission is needed to attain
  the Kyoto target in 2010.
• 6.5 will be attained by domestic efforts like
  energy efficiency improvement.
• 5.5 is considered to be achieved by forest sinks
  and Kyoto mechanisms
• A carbon tax is considered as another option to
  decrease GHG emission.

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2 Methodology

• Three types of models for the analysis of
  Economy-Energy-Environment issues Optimal
  Programming Model, CGE Model, and Econometric
  Model.
• Optimal programming model
• MESSAGE(2000, 2001), AIM(2004), MARIA(2004),
  GRAPE(2004), DNE21(2004) etc.
• ERI, China developed this type model for China
  collaborating with the National Institute for
  environmental Studies (NIES), Japan. This model
  is integrated as China part of AIM.
• CGE model,
• MERGE(2004), GTAP(2002) etc.
• For China, Jian Xie and Sindey Salzman (2000),
  Zhong Xiang Zhang (1998) applies CGE model.
• Econometric model
• Li ZhiDong (2003), Wu, Nemoto, and Kinoshita
  (2004), Yamada (2004), Ueda et al. (2004) etc.

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Table 2 Recent Econometric Models of China (and
Thailand)
Model/Authors Macro Sector Energy Environment Region
Li ZhiDong(2003) 1951-2000 Energy-intensive products Energy Balance Table/IEA 1971-1999 Co2/So2 China
Inada, Yoshihisa(2004) - - Energy Balance table/IEA CO2/SO2 China
F.G. Adams, Yasukazu Ichino, and P.A. Prazmowski(2000) - - Energy Balance Table/IEA 1971-1993 - Thailand
Ge Wu, Jiro Nemoto, and Soshichi Kinoshita(2004) 1980-1998 GDP determined from the supply side 3 sectors 1985-1998 Energy balance Table/China CO2 China
Mitsuo Yamada(2004) 1980-2000 15 sectors Energy balance Table/China 1985-2000 CO2 China
Mitsuo Yamada(2005) 1980-2002 21 sectors Energy Balance Table/IEA 1980-2002 CO2 China and Japan with international trade
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• ZhongXiang Zhang (2004) investigates the role of
  China under the Kyoto Protocol, using marginal
  abatement cost functions.
• Broadening the scope of the market of tradable
  permits from no emissions trading to full global
  trading, it is found that the gain of the OECD as
  a whole increases as the market expands.
• The developing countries also benefit from such
  an expansion (through financing and emission
  reduction).
• Inclusion of China in the emission trading
  framework increases the total supply of emission
  permits, so decrease the price of the emission
  permits.
• China is expected to emerge as the dominant host
  country of CDM projects.
• According to his study, the US and Japan are
  required higher emission reductions than the EU,
  so the gains of the two countries depend on the
  expansion of the emission permits trading market.
• This study shows the importance of China in the
  global trading market of CO2 emission permits.
• China is expected the dominant host country of
  the CDM projects, and Japan is also recognized as
  one of the important potential investing
  countries for the CDM projects.
• We will focus on the international cooperation
  between China and Japan through the CDM projects
  for the challenging reduction of GHG emissions,
  using an E3 econometric model.

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3 Features of the Model

• Our model( KeYMERIT-E3 ) consists of
• two sub-models, one for Japan and China each, and
  a sub-model of international trade.
• Each countrys sub-model is developed as an E3
  multi-sectoral model, which integrates a macro
  model and an input-output model into one model,
  including energy and environment parts.
• There are 21 sectors in each countrys model
• KeYMERIT-E3 Kinoshita-Yamada Multi-sectoral and
  Multi-regional Econometric Model for the Research
  on Industry and Trade E3 version

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Figure 6 The structure of the Model KeYMERIT-E3
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Figure 7 Economy (Macro Sectors) Part
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Input-output Structure
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RAS Method in Input-Output Analysis
These equations are estimated, however they are
set as constant for the following simulations
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Figure 8 The Energy Environment Parts
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Energy and Environment Parts

• Our main interest is in coal, oil, petroleum
  products, natural gas, and electricity, but
  nuclear, hydro, geothermal solar wind,
  combustible renewable and waste others, and
  heat are also treated in the model.
• The final consumption of energy is explained from
  each sectoral production activity.
• The energy transformation mechanism is explained
  in the model.
• The carbon dioxide emitted from the industries
  and household is explained by energy use in each
  country

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International Trade Sub-model

• There are 14 commodities and nine countries and
  regions Japan, China, Korea, Hong Kong and
  Taiwan, ASEAN 5 countries, the US, EU 15
  countries, the other developed countries, and the
  rest of the world.
• In this study, we focus on the relation between
  Japan and China
• Only key variables like GDP and GDP deflator and
  the exchange rate appear as exogenous variables
  for the other countries and regions.
• These countries and regions sub-models are
  planned to be developed step by step in the next
  phase.

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Table 3 Classification of Sectors
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Table 4 Data Sources
Table 5 Size of the Model
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Baseline Simulation

• Table 6 Assumptions

Table 7 Estimated values of representative
endogenous variables
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Figure 9 Industrial Structure of Japan
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Figure 10 Industrial Structure of China
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4 Some Simulation Results

• The introduction of energy-efficient technology
  is important to attain the goals of economic
  development and global environment improvement
  for China.
• Japan has incentives to cooperate because of her
  own interest in the compliance of the Kyoto
  Protocol.
• Simulations
• Case-1 China introduces new technologies (NGCC
  and IGCC) in the electricity sector to improve
  energy efficiency.
• Case-2 A carbon tax (2400Yen/tC approximately
  5Euro/tCO2) is introduced in Japan and China.

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An Outlook on the Electricity Demand in China

• According to the 10th Five Year Plan (2001-2005)
  in China, demand of electricity is estimated to
  expand from 1387 TWh (2000) to 4813 TWh (2030).
• The efficiency of coal-fired fuel plants is about
  32.
• For this increasing demand, more than 20 of 600
  MW-class power stations must be constructed every
  year.
• The cost of a large station, which is constructed
  by five major companies with the foreign partner
  like Japan and others, is half or one-third lower
  than the cost in Japan.
• From Agency of natural Resource and Energy, METI,
  Japan

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Case-1a NGCC in China

• Efficiency improvement(2010-2020) in thermal
  power stations by energy shift from coal to
  natural gas in China
• NGCC (Natural gas-fired Combined Cycle )
• 600 MW x 20 units per year for 10 years
• Construction Cost 500/kW (in 2000 US dollars)
• Thermal efficiency 53.6
• Operation starts five years after construction
• The first construction starts in 2006
• After operation, old coal thermal stations are
  replaced at the same volume.
• Main equipment, combustion turbine, (27.7 of
  total cost) is imported from developed countries.
• Import share from Japan is 20 (the US 50, EU15
  30).

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Case-1b IGCC in China

• Efficiency improvement (2010-2020) in thermal
  power stations by introducing new Clean Coal
  technology
• IGCC (Integrated Coal Gasification Combined
  Cycle)
• 600 MW x 20 units per year for 10 years
• Construction Cost 1,262/kW (in 2000 US dollars)
  
• Thermal efficiency 43.1
• Operation starts after 5 years construction
• The first construction starts in 2006
• After operation, an old coal thermal station is
  replaced at the same volume.
• Main equipment, gasifier and combustion turbine
  (42.4 of total Cost), is imported from the
  developed countries.
• Import share from Japan is 20 (the US 50, EU15
  30).

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Figure 11 Increases in Investment and GDP
Unit 100 Mil. Yuan in 2000 market prices
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Figure 12 Change in CO2 Emissions
Unit Mt-CO2
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Figure 13 Primary Energy Supply and Coal
Production
Unit
Unit ktoe
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Table 8 GHG Reduction Cost of NGCC and IGCC for
10 Years
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• NGCC directly reduces CO2 emission by 30 more
  than IGCC 1560 Mt-CO2 and 1190 Mt-CO2 for ten
  years respectively.
• Investment cost of NGCC is 40 of that of IGCC.
• GHG reduction cost of NGCC investment is 30 cost
  of IGCC, though we ignore the operational cost.
• If we consider social effect, the cost difference
  exaggerates up to 10
• Investment increases GDP in both case. Investment
  brings CO2 increase, which offsets partly the CO2
  reduction brought by introduction new technology.
  
• Coal production reduces in both cases, but high
  reduction appears in the NGCC case because of its
  energy shift to natural gas. Restructuring in the
  coal industry will be required especially in NGCC
  case.

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Figure 14 Effects on Machinery Products and GDP
in Japan
Unit
38

• The impact on Japan is higher for IGCC, because
  its higher investment induces larger volume of
  machinery trade directly.
• Effect on Japan is mainly positive on GDP and
  machinery production.
• The induced CO2 increase in Japan is 0.4 Mt-CO2
  and 3.1 Mt-CO2 for ten years respectively, which
  is almost negligible compared to the value in
  China.

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Case-2 Carbon Tax

• A carbon tax is another option for the reduction
  of GHG emissions
• Case2a 2400 Yen per ton-C (22.27 US dollar per
  ton-C and 654.5 Yen per ton-CO2) tax is
  considered by the Ministry of Environment, Japan
• Case2b Same tax (50.28 Yuan per ton-CO2) for
  China
• Case2c Lower tax for China (a quarter,
  considering the difference in economic scale
  between two countries)
• The tax is introduced in 2007 for each case.
• The tax is imposed on the final consumption of
  coal, petroleum, natural gas, and electricity.
• No allowance or exemption is considered.

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Figure 15 Impacts in Japan

• Price increases in energy sectors are 3 or 5
  points.
• GDP deflator increases up to 3 .
• GDP deceases by 0.14 or 0.43 .
• The difference in primary-energy supply and CO2
  reduction will be 1 or less.

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Figure 16 Impacts in China, Same Value case
and Lower Tax case
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Figure 17 CO2 Reduction in Each Case

• For Japan, the proposed carbon tax reduces 11
  and 16 Mt-CO2 in 2010 and 2020 respectively.
• This value is higher than that of governments
  estimate, using the AIM model 6 Mt-CO2 in 2010.
• For China, the same rate tax brings larger
  reduction in CO2, 95 Mt-CO2 and 58 Mt-CO2, than
  Japan.
• Lower (one quarter) tax rate in China of reduces
  Chinas emissions by 24 and 14 Mt-CO2.

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5 Concluding Remarks

• Developing an E3 econometric model, we evaluate
  the impacts of technological transfer from Japan
  to China, which might be possible future CDM
  projects.
• The basic idea of usual CDM is how much GHG will
  be reduced if the project is installed, comparing
  with the GHG emission level of typical
  alternative, called a baseline, if the project is
  not installed.
• Our evaluation is economy-wide, not just CDM
  project evaluation.
• Our study addresses the social evaluation in the
  sense that GHG emission from the initial
  investment activity is included and that the
  change in GHG emission stemmed from the other
  sectors production and household consumption is
  also considered.

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• Two technology transfer, NGCC and IGCC, are
  compared.
• NGCC reduces CO2 emission more effectively than
  IGCC.
• However, NGCC requires primary-energy demand
  shift from coal to natural gas.
• Coal production reduces in both cases, but high
  reduction appears in the NGCC case.
• Restructuring in the coal industry will be
  required strongly especially in NGCC case.

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• Japan receives stronger impact from IGCC, because
  its higher investment induces larger volume of
  machinery trade directly.
• The effect on Japan is positive mainly on GDP and
  machinery production.
• The induced CO2 increase in Japan is 0.4 Mt-CO2
  and 3.1 Mt-CO2 for ten years respectively, which
  is almost negligible compared with the reduction
  in China. But they might be not negligible in the
  Japans economy.
• Japan considers to reduce 20Mt-CO2 by Kyoto
  Mechanisms. Compared with this value, our
  scenario gives 31.2 Mt-CO2 reduction per year
  for NGCC and 23.8 Mt-CO2 per year for IGCC,
  assuming that Japans contribution is 20 in
  each project.
• For this project Japan needs 129.3 and 326.4
  billion yen per year respectively, which might be
  financed by carbon tax revenue.

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• Carbon tax effects
• For Japan, the proposed carbon tax reduces 11 and
  16 Mt-CO2 in 2010 and 2020 respectively.
• This is higher than the estimate of the
  Government, 6 Mt-CO2, using the AIM model.
• The difference is explained by our ignoring some
  tax exemptions. Actually our estimate of the tax
  revenue is 742 billion Yen, which is 1.5 times
  larger then the government estimate, 490 billion
  Yen.
• The tax reduces GDP by 0.14 and 0.43 in 2010
  and 2020 respectively. This would be reduced by
  using the tax revenue effectively.
• For China, the same rate tax brings larger
  reduction in CO2, 96 Mt-CO2 and 58 Mt-CO2, than
  Japan.
• One quarter rate Tax of Japan reduces 24 and 14
  Mt-CO2 in China.
• A given carbon tax in China saves GHG gas
  emission more effectively than the same tax in
  Japan.

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• Remaining issues
• Our simulation ends at 2020, this is a somewhat
  short to evaluate the issues after Kyoto. We
  would like to extend the simulation period up to
  2030.
• The RAS structure is one of the main features in
  our model. This is constrained as constant in our
  simulation, which has to be released.
• Adding the country and region sub-models, which
  are set as exogenous in the current model, for
  Korea, ASEAN, Hong Kong and Taipei, the US, EC15,
  other developed countries, and the rest of the
  world.
• IIASA has a lot of knowledge and experience in
  the field of energy and environment researches,
  so we are going to extend our research
  cooperatively.