1

E-Modeling

By: Energy Group

Advisors:Mark GehlharThomas Hertel

and Robert McDouglas

2

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.

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 Emission Trading

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

ResultsScenario 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.

Because

Implies

6

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

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

Welfare decomposition of implementing the Kyoto Protocol with no use of the flexibility mechanisms

-120000

-100000

-80000

-60000

-40000

-20000

0

20000

40000

US

A

EU

EE

FS

U

JPN

RoA

1

EE

x

CH

IND

RoW

A1

N-A

1

World

Allocative eff. Terms of trade eff.

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

Because of

8

Welfare decomposition of implementing the Kyoto Protocol w ith worldwide emission trading

-30000

-25000

-20000

-15000

-10000

-5000

0

5000

10000

15000

20000

US

A

EU

EE

FS

U

JPN

RoA

1

EE

x

CH

IND

RoW

A1

N-A

1

World

Trading eff. Allocative eff. Terms of trade eff.

Experiment No:2Experiment No:2A reduction in the losses in all A1 countries and a generation of substantial gains 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.in the EEFSU region the emission trading among A1 countries.Because of

9

Welfare decomposition of implementing the Kyoto Protocol with trading among Annex 1 countries

-60000

-50000

-40000

-30000

-20000

-10000

0

10000

20000

30000

Terms of trade eff.

Allocative eff.

Trading eff.

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

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!

How did we do this?

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, EEFSUOverall Gainers: USA, RoW.ToT: US, EU, JPN, and RoW gain, while EEFSU, RoA1, EEx and CHIND lose.

12

Welfare Decomposition

-50000

-40000

-30000

-20000

-10000

0

10000

1 USA

2 EU

3 EEFSU

4 JP

N

5 RoA1

6 EEx

7 CHIN

D

8 RoW

Region

EV

co

mp

on

ent

in m

n U

SD

ToT

Allocative eff.

Huge Allocative efficiency Losses in most regionsToT: US, EU, JPN, and RoW gain, while EEFSU, RoA1, EEx and CHIND lose.

13

Further Decomposition of Allocative Efficiency

-70000

-60000

-50000

-40000

-30000

-20000

-10000

0

10000

1 Agr

icultu

re

2 Coa

l3

Oil

4 Gas

5 Oil_

Pcts

6 Elec

tricit

y

7 En_

Int_in

d

8 Oth_

ind_s

er

Sector

EV

ch

an

ge

in

mn

US

D

8 RoW

7 CHIND

6 EEx

5 RoA1

4 JPN

3 EEFSU

2 EU

1 USA

Inferences: Almost no change in agriculture and oil. Fall in most countries for coal, gas, oil products, electricity, energy-intensiveIndustries 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

-1

-0.5

0

0.5

1

1.5

2

1 USA

2 EU

3 EEFSU

4 JP

N

5 RoA1

6 EEx

7 CHIN

D

8 RoW

Region

Pri

ce C

han

ge

Rat

e

Import Price Change

Export Price Change

Inferences:All import prices have increased and all export prices have increased, exceptin EEx, EEFSU. RoA1, CHIND have higher rise in import prices than in export pricesWhy????

15

Further Decomposition of Price Changes

-20

-15

-10

-5

0

5

10

15

20

25

30

1 USA

3 EEFSU

5 RoA1

7 CHIN

D

Regions

Exp

ort

Pri

ce C

han

ges

8 Oth_ind_ser

7 En_Int_ind

6 Electricity

5 Oil_Pcts

4 Gas

3 Oil

2 Coal

1 Agriculture

-20

-15

-10

-5

0

5

10

15

20

25

30

1 USA

3 EEFSU

5 RoA1

7 CHIN

D

Regions

Imp

ort

Pri

ce C

han

ges

8 Oth_ind_ser

7 En_Int_ind

6 Electricity

5 Oil_Pcts

4 Gas

3 Oil

2 Coal

1 Agriculture

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

-500

50100150200250300350400450

USA EU

EEFSUJP

NRoA1

EEx

CHIND

RoW

Region

Ch

ang

es i

n P

rice

s

Electricity

Oil_Pcts

Gas

Oil

Coal

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.

-200

-150

-100

-50

0

50

USA EU

EEFSUJP

NRoA1

EEx

CHIND

RoW

Regions

% C

han

ge

in E

mis

sio

ns

Electricity

Oil_Pcts

Gas

Oil

Coal

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

Welfare under the deviations from Kyoto committments (US$ million)

-40000 -35000 -30000 -25000 -20000 -15000 -10000 -5000 0 5000 10000

USA

EU

EEFSU

JPN

RoA1

EEx

CHIND

RoW

Kypto committments only 1/2 only 1/5

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

-30

-25

-20

-15

-10

-5

0

5

1 USA 3EEFSU

5 RoA1 7CHIND

Total

Percentage change in total CO2 emission

Total

23

Changes in coal prices

-20

0

20

40

60

80

100

120

140

160

regions

pri

ce le

vel

presim

postsim

24

P.C. Change in of total demand of coal (in volume)

-60

-50

-40

-30

-20

-10

0

10

USA EU EEFSU JPN RoA1 EEx CHIND RoW

region

post

pre

25

Welfare decomposition before simulation

-60000

-50000

-40000

-30000

-20000

-10000

0

10000

20000

30000

US

A

EU

EE

FS

U

JP

N

Ro

A1

EE

x

CH

IND

Ro

W

To

tal

countries

va

lue

in

millio

n d

olla

rs

tot_E1

alloc_A1

co2trd

Welfare decomposition after simulation

-50000

-40000

-30000

-20000

-10000

0

10000

20000

30000

US

A

EU

EE

FS

U

JP

N

RoA

1

EE

x

CH

IND

RoW

Tota

l

countries

valu

e i

n m

illi

on

do

llars

tot_E1

alloc_A1

co2trd

26

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

27

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

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 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

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 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

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