Belay Fekadu, Farzad Taheripour, Patrick Georges, David Mayer-Foulkes, Marianne Aasen, Hyun-Sik Chung, Kenatro Katsumata, Christa Clapp

1
GTAP_E

• Presented by
• Belay Fekadu, Farzad Taheripour, Patrick Georges,
  David Mayer-Foulkes, Marianne Aasen, Hyun-Sik
  Chung, Kenatro Katsumata, Christa Clapp

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
• sKE 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 (sKE) for
  energy-intensive industry sector in all regions
  to 5.0

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Energy Substitution Possibilities
Capital-Energy subproduct
sKE
Energy subproduct
Capital
sEN
Non-electrical
Electrical
sNEL
Coal
Non-coal
sNCOAL
Gas
Oil
Petroleum products
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Energy Substitution Possibilities
Carbon Permit Price Carbon emissions

• 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

  RCTAX RCTAX RCTAX gco2t gco2t
  base base exp base exp
USA USA 76.5 49.9 -26.3 -25.4
EU EU 76.6 50.0 -14.3 -13.2
EEFSU EEFSU 75.1 49.2 -26.6 -30.0
JPN JPN 76.6 50.0 -15.5 -14.4
RoA1 RoA1 76.8 50.1 -21.0 -21.1
EEx EEx 0.0 0.0 2.7 4.1
CHIND CHIND 0.0 0.0 1.1 2.7
RoW RoW 0.0 0.0 3.6 4.9
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Energy Substitution Possibilities
CAPENDEMAND qf(i,j,r) CAPENDEMAND qf(i,j,r) CAPENDEMAND qf(i,j,r) CAPENDEMAND qf(i,j,r) CAPENDEMAND qf(i,j,r) CAPENDEMAND qf(i,j,r) CAPENDEMAND qf(i,j,r) CAPENDEMAND qf(i,j,r) CAPENDEMAND qf(i,j,r) CAPENDEMAND 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
base 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
exp 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

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Energy Substitution Possibilities
WELFARE WELFARE WELFARE WELFARE WELFARE WELFARE WELFARE WELFARE WELFARE 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
base EU -5691 -15167 0 0 0 5256 -153 0 -15756
base EEFSU 23306 -4834 0 0 0 2097 109 0 20678
base JPN -4208 -7140 0 0 0 3083 -147 0 -8412
base RoA1 -2915 -5454 0 0 0 -2588 77 0 -10879
base EEx 0 -539 0 0 0 -14952 -27 0 -15519
base CHIND 0 660 0 0 0 -27 -20 0 612
base RoW 0 1194 0 0 0 2072 96 0 3362
base Total -218 -44239 0 0 0 -101 -1 0 -44560
exp USA -7652 -8384 0 0 0 5471 375 0 -10190
exp EU -4215 -14863 0 0 0 5070 -272 0 -14280
exp EEFSU 16551 -4460 0 0 0 1396 167 0 13654
exp JPN -2931 -7278 0 0 0 3241 -298 0 -7266
exp RoA1 -1887 -5146 0 0 0 -2735 -6 0 -9774
exp EEx 0 -140 0 0 0 -14324 -34 0 -14498
exp CHIND 0 1069 0 0 0 0 -31 0 1038
exp RoW 0 1613 0 0 0 1792 97 0 3502
exp Total -134 -37588 0 0 0 -90 -2 0 -37814

• For Annex 1 Welfare is decreased less with
  greater sKE 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

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Energy Substitution Possibilities

• Conclusions
• CapitalEnergy 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

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Tax Replacement Implications
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Concluding Comments

• 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