Hacia el Futuro:

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Hacia el Futuro Energy, Economics, and the
Environment in 21st Century Mexico Maria E.
Ibarraran and Roy Boyd EPA and SMF Workshop Rio
de Janeiro, September 2006
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Content of the book

• Part I
• 1. Introduction
• 2. Greenhouse Gas Emissions and Climate Change
• 3. Forecasting the Impact of Climate Change
• 4. Energy Use in Mexico (and Latin America)
• 5. Economic Theory, Emissions Control, and Kyoto

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Content (cont) and emphasis of what our model
does

• Part II
• 6. A Dynamic General Equilibrium Model
• 7. Simulation Results Under Competitive Scenarios
• 8. Simulation Results Under Imperfect Market
  Scenarios
• 9. Simulation Results with Emissions Trading
• 10. Conclusions

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Special features of our work

• Combines science, economics, and policy-making
• Science of climate change and evidence
• Emissions worldwide, in Latin America and in
  Mexico
• Regional and local impacts, especially for Mexico
• Energy use and trends in Mexico, Brazil,
  Argentina and Venezuela
• Economic analysis of climate change and possible
  solutions through incentives
• International agreements

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Table1. Carbon emissions from fossil fuel
consumption and flaring, (million metric tons of
CO2)
Source EIA, 2002.
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Expected impacts of climate change for Mexico

• Regional Impact
• Specific vulnerability
• Agriculture
• Forest ecosystems
• Desertification and Drought
• Hydrology
• Coastal zones
• Human Health

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Expected effects by 2025-2050
Desertification scenario
Corn production scenario
Sea level rise scenario
Drought scenario
8
Energy Use
Primary energy supply by fuel type
Total final energy consumption by sector
9
Energy Prices
Relation between domestic prices and opportunity
costs or external prices for petroleum fuels and
natural gas (1970-1988)
Comparison of electricity rates between Mexico
and U.S. (domestic rate/US rate)
10

Source EIA, 2004.
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Features of the Dynamic Computable General
Equilibrium Model

• The model is calibrated using 2000 data and is
  run for a total of 21 years to 2020.
• The model is composed of 9 production sectors 7
  consumption sectors, 4 consuming agents
  segregated by income group, a government sector,
  and a foreign trade sector.
• The model solves in such a way that savings plus
  imports are equated with investment plus exports.

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Features of the Dynamic Computable General
Equilibrium Model (cont.)

• The model assumes rational expectations on the
  part of all agents
• Labor and productivity growth are consistent with
  present OECD projections (i.e. 1.3 and 1.6)

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Further Model Assumptions

• All demand and substitution elasticities used are
  based on current empirical estimates and varied
  in a sensitivity analysis.
• A flexible nesting structure is used based on a
  CES production and consumption structure.
• The model has special features to all for taxes,
  tariffs, subsidies, technological change and
  depletion.
• The model is constructed in such a way as to
  allow detailed analysis of the fossil fuel and
  power sectors.
• A total of 25 simulations were run assuming a
  variety of policies and market conditions

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Sectors in the Model
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Mathematical Description of the Model
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(9) Kt1 Kt(1-?) INVt t 1, , T where ?
stands for the rate of depreciation and INV
stands for gross investment. This states that
the capital stock in the next period must be
equal to this years capital stock plus net
investment. Taken together, equations 7-9 insure
that economic growth will be consistent with
profit maximizing behavior on the part of
investors.
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Perfect Competition

• The model is first run under the assumptions of
  perfect competition and full employment to see
  the impact of various energy policies and
  technological change on key economic variables as
  well as CO2 emissions.
• A total of 9 different scenarios are run under
  these assumptions.

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GDP and CO2 Emissions Under the Various Scenarios
Run
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Important Points From these Simulations

• Our results make it clear that discussions of
  energy policy have to recognize the importance of
  depletion and investment in the choice of energy
  alternatives.
• For every ton of carbon emissions avoided, GDP
  declines by about 104 dollars. (note-very much
  in line with others results e.g. EPA)
• This number is fairly high with respect to other
  developing countries (i.e. China) and reflects
  the fact that Mexico has little ability to shift
  from high carbon content fuels (such a
  significant coal deposits) to fuels with
  substantially lower or no carbon content (such as
  natural gas, hydroelectric power, or nuclear
  power.

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Important Points (Cont.)

• The results of our simulations show that a carbon
  tax, in spite of the significant environment
  benefits in terms of stemming carbon dioxide and
  other harmful emissions, will entail significant
  costs in terms of both economic efficiency and
  consumer equity
• The simulations so demonstrate the importance of
  technology for both the energy and non energy
  sectors.
• Our results are quite robust with respect to the
  parametric assumptions made in terms of the speed
  of growth and the elasticities of demand as well
  as substitution in production.

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Results Under Imperfect Competition and
Non-frictional Unemployment

• The model is then run assuming that we have
  sticky wages to see the effects of this on our
  modeling results.
• We then run the model under the assumption of
  monopoly power in the petroleum (and petroleum
  products) industry. Similar assumptions are used
  for the power industry.

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GDP and Emissions for Scenarios Nine through
Sixteen
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Important Points From the Second Set of
Simulations

• Technological change is essential for sustained
  growth.
• The nature of the technological change, however,
  is critical in terms of the environment.
• Carbon tax design is a great importance.
• The effect of Monopoly is ambiguous.
• Persistent unemployment combined with carbon
  taxation can have disastrous effects.

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Emission Trading with the U.S

• The model is re-aggregated to allow us to see the
  workings of the forestry and agricultural
  sectors.
• It is then re-run under the assumption that
  emitters of GHGs have to purchase carbon
  sequestration rights in order to emit over a
  certain specified level.
• Initially the analysis is limited to emitters and
  forest owners within Mexico.

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Emission trading with the U.S. (continued)

• The model of Mexico is then combined with a
  similar dynamic CGE model of the U.S.
• The model simulations are then re-run assuming
  that emitters from the U.S. are required to
  purchase sequestration rights from forest
  owners in Mexico.
• The results of the two sets of simulations are
  then compared to see what is most cost effective.

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Conclusions with Emissions Trading

• If (after some level of emissions) GHG emitters
  are required to purchase sequestration rights for
  a certain percentage of their additional carbon
  emissions, such rights can lower GHG levels both
  by sequestering significant levels of carbon in
  carbon sinks and by reducing the level of the
  producers GHG emissions.
• The costs are relatively high if trading is
  combined to Mexico.
• When trades between the U.S. and Mexico are
  allowed, however the situation changes and the
  aggregate costs decline by over 80.

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Emissions trading conclusions (continued)

• When permits are required, U.S. producers cut the
  usage of all fossil fuels but do so relatively
  more with coal and oil than on natural gas. This
  is impossible for Mexican emitters to do and
  underscores the importance of international
  permit trading.
• Such gains come at relatively low costs when
  countries with ample reserves of low carbon
  fuels, such as the U.S., can participate.
• The potential for unintended spillovers such as
  carbon leakage seem to be relatively small in
  scope and easily managed with proper policy
  design.

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General Conclusions

• Two features (i.e. depletion and technological
  change) to a large extent drive the overall
  results of our simulation analysis in terms of
  emissions. The relationship of the two is complex
  but critical to our analysis.
• An overall finding of our analysis is that energy
  efficient technological change is of major
  importance if Mexico is to seriously reduce
  emissions without experiencing harmful effects on
  its economic growth and welfare.

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General Conclusions (continued)

• It is also essential to eliminate market
  distortions such as energy price distortions and
  labor market imperfections if policymakers want
  to guard against severe economic contraction when
  carbon taxes or other similar sorts of emission
  controls are introduced.
• Finally, although the exercise of monopoly power
  by state owned energy producers has the potential
  to decrease emissions through supply
  restrictions, the use of such power is not to be
  recommended.

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and some recent work

• Simulate the effect of extreme weather events on
  the Mexican economy drought
• We use model used for emissions trading
• Scenarios cover
• No drought
• Severe drought
• Adaptation policies (agric., forestry, power)

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and basic results

• Drought has a sectoral impact, mainly on
  agriculture and grazing, forestry, and power
  generation (hydro), and ripple effects throughout
  the economy
• Regressive impact on welfare
• Adaptation policies (technological change and
  irrigation) can only partly mitigate its effects.