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Centre of Economic
Scenario Analysis and Research
Centre of Econom ic
Scenario Analysis and Research
Consumption vs. Production
Based CO2
Pricing Policies:
Macroeconomic Trade-offs and
Carbon Leakage
Kurt Kratena
International Energy Workshop 2016
University College Cork, 1-3 June
Centre of Economic
Scenario Analysis and Research
Centre of Econom ic
Scenario Analysis and Research
The scope of European climate policy
• The European consumer contributes directly
(domestically) and indirectly (globally) to GHG
emissions via the CO2e footprint
• The problem of „leakage‟ in a „unilateral
action‟ scenario of European carbon pricing
• Higher costs of European industry
relocation of energy intensive production
hurting jobs in Europe & no change or higher
GHG emissions globally
• Consumer demand in Europe is the
determinant of leakage
Centre of Economic
Scenario Analysis and Research
Centre of Econom ic
Scenario Analysis and Research
The problem of leakage
• Two ways to overcome the problem of
„leakage‟ in a unilateral scenario of European
carbon pricing
1) Increase energy/emission productivity
more than the effective energy price
(including the carbon price) by additional
measures (R&D subsidies, regulation, etc.)
2) Tax embodied GHG emissions in order to
reduce European demand
• Comparing 2) with „classical carbon tax‟
Centre of Economic
Scenario Analysis and Research
Centre of Econom ic
Scenario Analysis and Research
Simulations with EU 27 DYNK Model
• DYNK (DYnamic New Keynesian) model: Hybrid
between econometric IO and CGE; „New
Keynesian‟: full employment in the long-run,
short-run rigidities (liquidity constraints, wage
bargaining)
• EU 27 as one economy, 59 industries, five
household income groups, 47 consumption
categories
• Public budget constraint (stability programme)
as model closure
• Detailed modelling of consumption activities
link to physical energy/emission flows
direct, indirect and imported CO2e footprint
Centre of Economic
Scenario Analysis and Research
Centre of Econom ic
Scenario Analysis and Research
Consumption Model
• Demand functions and demand systems
• 5 groups of disposable income
Durables
Houses Vehícles Non Durables
HeatingElectricityOther ND
Food Clothing etc.
Public Transport
Fuels
Consumption
Centre of Economic
Scenario Analysis and Research
Centre of Econom ic
Scenario Analysis and Research
Direct energy demand
• Utilization of durable stock by households,
panel data (EU 27, 1995 – 2012)
– Electricity demand
– Price elasticity: (gheat
– 1) and (gel
– 1)
Eight nondurable non-energy categories
– Budget share equation:
– Price elasticity:
heatel
tel
tel
elel
tapp
teldd
p
K
CPlogloglog
,
,
,
,
g
j
ijijiiP
Cpw loglog g
jiij
i
jiij
j
iC
ij ww
w
p
C
g
log
log
Centre of Economic
Scenario Analysis and Research
Centre of Econom ic
Scenario Analysis and Research
Consumption parameters
Price and expenditure elasticity of energy
and non-energy demand of EU households
Nondurable own price expenditure elasticity
Consumption elasticity Time series Cross section
Food -0.14 0.85 0.61
Clothing -0.64 1.04 1.28
Furniture/equipment -1.06 1.11 1.46
Health -0.83 0.98 1.20
Communication -0.89 0.96 0.68
Recreation/accomodation -0.50 1.08 1.27
Financial Services -0.94 1.33 1.00
Other -0.68 1.09 1.00
Energy own price durable stock
Consumption elasticity elasticity
Transport fuel -0.77 1.00
Heating -0.87 1.00
Electricity -0.81 1.00
Centre of Economic
Scenario Analysis and Research
Centre of Econom ic
Scenario Analysis and Research
Direct household emissions
• Total consumption by quintile (q) &
category
• Energy consumption: monetary physical
units
• Direct GHG emissions:
5,261,26
5,11,1
e
......
..........
..........
......
ee
ee
cc
cc
C
..........
...
..........
...
...
...
...
...
5,1,
5,1,
5,1,
5,1,
5,1,
5,1,
C
jj
elel
heatheat
fuelfuel
vehveh
houshous
cc
cc
cc
cc
cc
cc
C
eeGHG,qGHG, CemEM
Centre of Economic
Scenario Analysis and Research
Centre of Econom ic
Scenario Analysis and Research
Production parameters
Parameters for factor demand (price
elasticity, factor bias) and wage functions
own price cross price rate of
Production elasticity elasticity, E/K factor bias
K, all industries -0.95 0.00
L, all industries -0.51 -0.01
E, all industries -0.53 0.02
E, energy intensive -0.37 0.20 0.00
all industries 0.15
M(m) -0.75 0.02
long-run
Wage curve elasticity
Consumer price 0.82
Productivity 0.27
Unemployment rate -0.06
own price expenditure
elasticity elasticity
Food -0.142 0.882
Clothing -0.638 1.010
Furniture -1.057 1.061
Health -0.827 0.977
Communication -0.886 1.031
Recreation -0.504 1.060
Financial services -0.937 1.253
Other -0.684 1.071
own price expenditure
elasticity elasticity
Food -0.142 0.612
Clothing -0.638 1.275
Furniture -1.057 1.463
Health -0.827 1.196
Communication -0.886 0.678
Recreation -0.504 1.271
Financial services -0.937 1.000
Other -0.684 1.000
Centre of Economic
Scenario Analysis and Research
Centre of Econom ic
Scenario Analysis and Research
Indirect household emissions
• Total energy demand in production (5
energy types): inter-fuel substitution
• Emissions in production
• Indirect domestic GHG emissions by
quintile (q):
ji i
iEitEjiijE
i
iEiiE
i
iEiEE ptppppp,
,,,
2
,,,,0 )log()log()log()log(2
1)log(log gg
tpv itE
ji
iEijEiEiE ,
,
,,,, )log( g
qemEemEMd
GHGe
d
eGHG,jGHG,
q
j
q
j
c
q
c
E
d
d
d
djj
Centre of Economic
Scenario Analysis and Research
Centre of Econom ic
Scenario Analysis and Research
Imported household emissions
• Total imports in intermediate and final
demand and
• Emissions in imports
• Indirect imported GHG emissions by
quintile (q):
QpSVQpSVIMm
E
m
NE QEQMˆˆ FMf
IMemEMm
GHG
m
GHG
qc
M
d
d
Centre of Economic
Scenario Analysis and Research
Centre of Econom ic
Scenario Analysis and Research
Policy: Pricing GHG emissions
• Two different taxation schemes: “Green Tax
Reform” and “Environmental Fiscal
Devaluation”
• Green Tax Reform: GHG emissions are taxed
and social security contributions (employers'
and employees') are reduced (ex post public
revenue neutrality)
• Environmental Fiscal Devaluation: GHG
emissions embodied in private consumption
are taxed at the same rate and social
security contributions reduced = special
case of fiscal devaluation (price effects of
currency devaluation by rising consumption
taxes and lowering labour taxes)
Centre of Economic
Scenario Analysis and Research
Centre of Econom ic
Scenario Analysis and Research
Policy: Pricing GHG emissions
• CO2
tax according to the EU Roadmap: 25 €/t
CO2
in 2015 (in € of 2005) 250 €/t CO2
in
2050 (in € of 2005)
• „Green Tax Reform‟: taxing production and
consumption flows in Europe
• „Environmental Fiscal Devaluation‟: the EU 27
DYNK model gives indirect domestic GHG
emission per unit of private consumption
good (59 commodities)
• Leakage: Indirect imported GHG emission per
unit of private consumption good (59
commodities) from a static multi-regional
input-output (MRIO) model, based on WIOD
(www.wiod.org)
Centre of Economic
Scenario Analysis and Research
Centre of Econom ic
Scenario Analysis and Research
Output price effects of "Green Tax
Reform": difference to BASE in %
-2 0 2 4 6 8 10 12 14
TOTAL
Pulp, paper and paper products
Coke, refined petroleum products
Chemicals, chemical products
Other non-metallic mineral products
Basic metals
Office machinery and computers
Radio, television and communication equipment
Medical, precision and optical instruments
Electrical energy, gas, steam and hot water
Land transport; transport via pipeline services
Air transport services
Public administration and defence services
Education services
Health and social work services
Sewage and refuse disposal services, sanitation
Membership organisation services
Recreational, cultural and sporting services
Difference to baseline in %
2020
Centre of Economic
Scenario Analysis and Research
Centre of Econom ic
Scenario Analysis and Research
Macroeconomic effects of "Green Tax
Reform": difference to BASE in %
2015 2020 2030 2050
GDP, const. prices -0.69 -2.41 -7.34 -16.95
Private Consumption, const. prices -0.26 -1.41 -4.65 -10.65
Public Consumption, const. prices -2.49 -5.20 -10.87 -17.98
Capital formation, const. prices -0.28 -1.06 -3.51 -8.47
Storage, const. prices -0.09 -0.96 -3.74 -9.68
Exports, const. prices -0.09 -0.95 -3.68 -9.55
Imports, const. prices -0.12 1.48 8.71 24.12
Employment (persons) 0.36 0.35 -0.03 -0.63
Employment (hours) 0.37 0.37 0.01 -0.59
Unemployment (persons) -2.60 -2.84 0.27 12.69
Unemployment rate (% points) -0.32 -0.31 0.02 0.60
GHG emissions, households -5.36 -8.00 -11.80 -14.62
GHG emissions, production -10.23 -18.13 -31.22 -44.62
GHG emissions, total -9.01 -15.62 -26.53 -37.50
GHG emissions, Leakage -0.09 0.23 2.04 10.44
Centre of Economic
Scenario Analysis and Research
Centre of Econom ic
Scenario Analysis and Research
GDP, energy and emissions:
"Green Tax Reform"
0
20
40
60
80
100
120
140
160
180
200
GDP, const. prices
GDP BASE, const. prices
Final Energy Consumption
GHG emissions, total
Centre of Economic
Scenario Analysis and Research
Centre of Econom ic
Scenario Analysis and Research
Macroeconomic effects of
"Green Tax Reform"
• Short-run positive impact on labour, long-run
negative on GDP and labour (0.4% points p.a.
less GDP growth): short-run employment double
dividend and significant emission reduction
• Energy (CO2) is not only a factor of production,
but also a consumption good price increases
in the long-run: compensation of labour tax
reduction by employee‟s wage increases
• GHG emission reduction by more than 40%
• „Leakage‟: 1.5% in the short run, 28% in 2050
Centre of Economic
Scenario Analysis and Research
Centre of Econom ic
Scenario Analysis and Research
Effects of "Green Tax Reform" on
households: difference to BASE in %
2015 2020 2030 2050
Durable consumption, const. prices -0.02 -0.50 -1.57 -2.56
Nondurable consumption, const. prices -0.48 -2.08 -6.59 -14.72
Energy, const. prices -4.75 -7.27 -11.11 -14.75
Real disposable income, const. Prices 2015 2020 2030 2030
Total -0.11 -1.09 -4.16 -10.59
1st quintile -0.96 -2.55 -6.65 -14.05
2nd quintile -0.66 -2.10 -6.02 -13.26
3rd quintile -0.39 -1.62 -5.19 -12.11
4th quintile -0.10 -1.11 -4.27 -10.81
5th quintile 0.24 -0.47 -3.02 -9.00
Centre of Economic
Scenario Analysis and Research
Centre of Econom ic
Scenario Analysis and Research
Employment effects of "Green Tax
Reform”: difference to BASE in %
-2 -1 0 1 2 3 4 5 6
TOTAL
Food products and beverages
Textiles
Wearing apparel; furs
Pulp, paper and paper products
Printed matter and recorded media
Coke, refined petroleum products
Chemicals, chemical products
Other non-metallic mineral products
Basic metals
Fabricated metal products
Machinery and equipment
Office machinery and computers
Electrical machinery
Radio, television and communication equipment
Medical, precision and optical instruments
Difference to baseline in %
2020
Centre of Economic
Scenario Analysis and Research
Centre of Econom ic
Scenario Analysis and Research
Employment effects of "Green Tax
Reform”: difference to BASE in %
-2 -1 0 1 2 3 4 5 6
TOTAL
Motor vehicles, trailers and semi-trailers
Electrical energy, gas, steam and hot water
Retail trade services
Hotel and restaurant services
Land transport; transport via pipeline services
Air transport services
Post and telecommunication services
Financial intermediation services
Research and development services
Other business services
Public administration and defence services
Education services
Health and social work services
Other services
Difference to baseline in %
2020
Centre of Economic
Scenario Analysis and Research
Centre of Econom ic
Scenario Analysis and Research
Price effects of "Environmental Fiscal
Devaluation": diff. to BASE in %
-1.6 -1.4 -1.2 -1.0 -0.8 -0.6 -0.4 -0.2 0.0
TOTAL
Pulp, paper and paper products
Coke, refined petroleum products
Chemicals, chemical products
Other non-metallic mineral products
Basic metals
Office machinery and computers
Radio, television and communication equipment
Medical, precision and optical instruments
Electrical energy, gas, steam and hot water
Land transport; transport via pipeline services
Air transport services
Public administration and defence services
Education services
Health and social work services
Sewage and refuse disposal services, sanitation
Membership organisation services
Recreational, cultural and sporting services
Difference to baseline in %
2020
Centre of Economic
Scenario Analysis and Research
Centre of Econom ic
Scenario Analysis and Research
Macroeconomic effects of "Env. Fiscal
Devaluation": difference to BASE,%
2015 2020 2030 2050
GDP, const. prices 0.26 0.43 0.27 -1.66
Private Consumption, const. prices 0.02 -0.58 -1.95 -3.40
Public Consumption, const. prices 0.17 0.32 0.76 3.36
Capital formation, const. prices -0.03 0.09 0.06 -1.05
Storage, const. prices 0.31 0.91 1.19 -1.58
Exports, const. prices 0.32 0.92 1.28 -1.10
Imports, const. prices -0.84 -2.86 -5.16 0.99
Employment (persons) 0.30 0.74 1.32 2.03
Employment (hours) 0.29 0.72 1.26 1.78
Unemployment (persons) -2.18 -6.09 -13.93 -40.84
Unemployment rate (% points) -0.27 -0.66 -1.21 -1.93
GHG emissions, households -3.61 -7.19 -10.45 -10.16
GHG emissions, production -0.45 -1.56 -3.85 -9.93
GHG emissions, total -1.24 -2.96 -5.44 -9.98
GHG emissions, Leakage -0.37 -1.00 -2.24 -4.16
Centre of Economic
Scenario Analysis and Research
Centre of Econom ic
Scenario Analysis and Research
GDP, energy and emissions: :
"Environmental Fiscal Devaluation"
0
20
40
60
80
100
120
140
160
180
200
GDP, const. prices
GDP BASE, const. prices
Final Energy Consumption
GHG emissions, total
Centre of Economic
Scenario Analysis and Research
Centre of Econom ic
Scenario Analysis and Research
Macroeconomic effects of
“Environmental Fiscal Devaluation"
• Short- and log-run positive impact on labour
and on GDP (0.1% points p.a. higher GDP
growth until 2030), long-run employment
double dividend and emission reduction
• Exports increase (lower output prices) and
consumption decreases (higher consumer
prices) devaluation effect (decrease of
imports!)
• GHG decrease less, because taxing
consumption embodied emissions is not an
efficient instrument for emission reduction in
production
• Negative „leakage‟: 30% in the short-run, 42%
in 2050
Centre of Economic
Scenario Analysis and Research
Centre of Econom ic
Scenario Analysis and Research
Household effects of "Env. Fiscal
Devaluation": difference (%) to BASE
2015 2020 2030 2050
Durable consumption, const. prices 0.22 0.65 1.18 3.68
Nondurable consumption, const. prices -0.04 -1.00 -3.09 -5.34
Energy, const. prices -2.90 -5.91 -8.47 -6.94
Real disposable income, const. Prices 2015 2020 2030 2030
Total 0.16 0.16 0.36 2.83
1st quintile -0.26 -1.48 -3.82 -7.38
2nd quintile -0.09 -0.88 -2.49 -4.51
3rd quintile 0.05 -0.33 -1.06 -1.04
4th quintile 0.19 0.25 0.48 2.80
5th quintile 0.31 0.76 1.99 6.93
Centre of Economic
Scenario Analysis and Research
Centre of Econom ic
Scenario Analysis and Research
Employment effects of "Env. Fiscal
Devaluation": difference to BASE in %
-3 -2 -1 0 1 2 3 4
TOTAL
Food products and beverages
Textiles
Wearing apparel; furs
Pulp, paper and paper products
Printed matter and recorded media
Coke, refined petroleum products
Chemicals, chemical products
Other non-metallic mineral products
Basic metals
Fabricated metal products
Machinery and equipment
Office machinery and computers
Electrical machinery
Radio, television and communication equipment
Medical, precision and optical instruments
Difference to baseline in %
2020
Centre of Economic
Scenario Analysis and Research
Centre of Econom ic
Scenario Analysis and Research
Employment effects of "Env. Fiscal
Devaluation": difference to BASE in %
-3 -2 -1 0 1 2 3 4
TOTAL
Motor vehicles, trailers and semi-trailers
Electrical energy, gas, steam and hot water
Retail trade services
Hotel and restaurant services
Land transport; transport via pipeline services
Air transport services
Post and telecommunication services
Financial intermediation services
Research and development services
Other business services
Public administration and defence services
Education services
Health and social work services
Other services
Difference to baseline in %
2020
Centre of Economic
Scenario Analysis and Research
Centre of Econom ic
Scenario Analysis and Research
GHG emissions, with and without
'leakage' in both policy options
0
20
40
60
80
100
120
GHG, Green Tax
GHG, Green Tax w. Leakage
GHG, Envir. Devaluation
GHG, Envir. Devaluation w. Leakage
Centre of Economic
Scenario Analysis and Research
Centre of Econom ic
Scenario Analysis and Research
Policy conclusions
• Putting the burden on the European producer
& consumer: strong emission reduction,
short-run positive labour market impact, long-
run negative for price-competitiveness
relocation & leakage
• Putting the burden on the European
consumer: weak absolute emission reduction,
short- and long-run positive impact on GDP
and employment, positive for price-
competitiveness negative leakage
Centre of Economic
Scenario Analysis and Research
Centre of Econom ic
Scenario Analysis and Research
Policy conclusions
• Including leakage in the analysis still shows
much higher emission reduction in the Green
Tax Reform scenario
• An efficient policy integrates Green Tax
Reform with Footprint taxation and
differentiated compensation schemes for
producers and consumers
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