E-Modeling
By: Energy Group
Advisors:
Mark Gehlhar
Thomas Hertel
and
Robert McDouglas
1
Introduction and Motivation
- Modeling 3E’s –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.
2
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 nonCoal (ELCO)
- Exp4: Different Elasticities of Substitution between Capital and
Energy
3
Marginal Costs of Achieving the Kyoto Targets with and
without Using the Flexibility Mechanisms
Kyoto with No Use of
the Marginal Costs
% Reduction
of Emissions
(1997 USD per
Ton of Carbon)
Kyoto with Emission
Trading
% Reduction of
Emissions
(1997 USD per
Ton of Carbon)
Kyoto with Worldwide
Marginal Costs
% Reduction of
Emissions
(1997 USD per
Ton of Carbon)
USA
-36
126
-27
78
-13
30
EU
-22
147
-14
78
-6
30
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
EEFSU
Annex1
-24
-22
-10
NonAnnex
2
1
-19
4
Results
Scenario 1(Kyoto with No Use of the Marginal Costs)
• Emission reductions range from 20 to 40%.
• Carbon Leakage Implies 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 Because 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.
5
Macroeconomic Impact of Implementing the Kyoto Protocol: Percentage change in
welfare and TOT
Kyoto with no use of
the Flexibility
Mechanism
Kyoto with ET among
Annex1
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
-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
EEx
6
Welfare decomposition of implementing the Kyoto
Protocol with no use of the flexibility mechanisms
40000
20000
0
World
N-A1
A1
RoW
CHIND
EEx
RoA1
JPN
EEFSU
EU
USA
-20000
-40000
-60000
Allocative eff.
Terms of trade eff.
-80000
-100000
-120000
Experiment 1:
Net energy exporters A1 economies experience higher cost Because
theof
degradation of the terms of trade.
EEFSU loss is due to the fall of the energy exports value.
7
Welfare decom position of im plem enting the Kyoto
Protocol w ith w orldw ide em ission trading
20000
15000
10000
5000
0
-5000
-10000
-15000
-20000
Trading eff.
A llo cative eff.
Terms o f trade eff.
-25000
-30000
World
N-A1
A1
RoW
CHIND
EEx
RoA1
JPN
EEFSU
EU
USA
Experiment No:2
A reduction in the losses in all A1 countries and a generation of substantial gains
in the EEFSU region Because of the emission trading among A1 countries.
8
Welfare decomposition of implementing the Kyoto Protocol with trading
among Annex 1 countries
30000
20000
10000
Terms of trade eff.
ld
W
or
1
-A
N
A1
EE
x
C
H
IN
D
R
oW
oA
1
N
JP
R
-20000
EU
U
SA
-10000
EE
FS
U
0
Allocative eff.
-30000
-40000
Trading eff.
-50000
-60000
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 Because of the worldwide
emission trading system.
9
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!
10
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.
11
Welfare Decomposition
Ro
W
8
D
IN
7
CH
Ro
A1
6
EE
x
5
JP
N
4
EE
FS
U
EU
3
2
-10000
US
A
0
1
EV component in mn USD
10000
ToT
-20000
Allocative eff.
-30000
-40000
-50000
Region
Huge Allocative efficiency Losses in most regions
ToT: US, EU, JPN, and RoW gain, while EEFSU, RoA1, EEx and CHIND lose.12
Further Decomposition of Allocative Efficiency
10000
O
6
El
ec
tr i
ci
ty
7
En
_I
nt
_i
nd
8
O
th
_i
nd
_s
er
s
il_
Pc
t
as
G
O
3
C
oa
l
il
4
5
Ag
r
-20000
2
re
8 RoW
ic
ul
tu
-10000
1
EV change in mn USD
0
-30000
7 CHIND
6 EEx
5 RoA1
4 JPN
-40000
3 EEFSU
-50000
2 EU
1 USA
-60000
-70000
Sector
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! 13
Decomposition of ToT Changes
2
1
Import Price Change
0.5
Export Price Change
Ro
W
D
8
IN
7
CH
EE
x
1
6
Ro
A
5
JP
N
4
FS
U
EE
2
3
1
-0.5
EU
0
US
A
Price Change Rate
1.5
-1
Region
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????
14
Further Decomposition of Price Changes
30
30
-15
-20
1 Agriculture
-10
-15
D
IN
2 Coal
3 Oil
-5
CH
D
IN
CH
7
5
U
EE
FS
3
-10
Ro
A1
3 Oil
-5
4 Gas
0
7
4 Gas
0
5 Oil_Pcts
5
Ro
A1
5 Oil_Pcts
5
6 Electricity
10
5
6 Electricity
10
7 En_Int_ind
15
U
7 En_Int_ind
15
8 Oth_ind_ser
20
EE
FS
20
25
3
8 Oth_ind_ser
Import Price Changes
1
US
A
Export Price Changes
1
US
A
25
2 Coal
1 Agriculture
-20
Regions
Regions
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.
15
Change in Emissions and Fuel Prices
-200
Regions
Ro
W
D
IN
CH
US
A
-150
Coal
EE
x
Coal
Oil
Ro
A1
Oil
Gas
JP
N
-100
Oil_Pcts
U
Gas
Electricity
EU
Oil_Pcts
450
400
350
300
250
200
150
100
50
0
-50
EE
FS
Electricity
Changes in Prices
Ro
W
D
IN
CH
EE
x
Ro
A1
JP
N
U
EE
FS
-50
EU
0
US
A
% Change in Emissions
50
Region
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.
16
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.
17
Extended Experiment No: 2
Deviations 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
18
Welfare under the deviations from Kyoto committments (US$ million)
RoW
CHIND
EEx
RoA1
JPN
EEFSU
EU
USA
-40000
-35000
-30000
-25000
-20000
-15000
Kypto committments
-10000
only 1/2
-5000
0
5000
10000
only 1/5
19
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.
20
EXTENDED EXPERIMENT NO: 3
Increase in Elasticity of Substitution Between Coal and nonCoal (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.
21
Percentage change in total CO2 emission
5
0
-5
-10
-15
Total
-20
-25
-30
1 USA
3
EEFSU
5 RoA1
7
CHIND
Total
22
Changes in coal prices
160
140
100
80
presim
60
postsim
40
20
Ro
W
D
IN
CH
EE
x
Ro
A1
JP
N
U
EE
FS
-20
EU
0
US
A
price level
120
regions
23
P.C. Change in of total demand of coal (in volume)
10
0
-10
USA
EU
EEFSU
JPN
RoA1
EEx
CHIND
RoW
-20
post
-30
pre
-40
-50
-60
region
24
30000
Welfare decomposition before simulation
10000
0
Total
RoW
CHIND
EEx
RoA1
-20000
JPN
EEFSU
-10000
EU
USA
value in million dollars
20000
-30000
-40000
tot_E1
-50000
alloc_A1
countries
co2trd
-60000
30000
Welfare decomposition after simulation
value in million
dollars
20000
10000
0
Total
RoW
CHIND
EEx
RoA1
JPN
EEFSU
EU
-20000
USA
-10000
tot_E1
-30000
alloc_A1
-40000
-50000
countries
co2trd
25
Reduction in RCTax
RCTAX
Sub=0.5
Sub=1.5
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
26
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
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
27
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.
28
Extended Experiment No:4
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
29
• 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
30
Why does Europe’s 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
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
31
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 noncoal, 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
32