Download Stroombergen_Reisinger

The Macroeconomic Impact
of Alternative GHG
Exchange Rate Metrics
Presentation to
Motu Climate Economics
Research Workshop
20 March 2012
Adolf Stroombergen
& Andy Reisinger
Model
MAGICC version 6
Calculates exchange rates between CO2 and nonCO2 gases, for a variety of alternative normative
choices regarding the quantity of interest and time
horizon, and for a range of climate and carbon
cycle model emulations and concentration
pathways.
Linkages
non-CO2
metrics
MESSAGE
Calculates cost-effective multi-gas emissions
pathways and mitigation costs over the 21st century
to meet a a pre-determined stabilisation target in
the year 2100.
GHG
prices and
bioenergy
demands
GLOBIOM
Calculates changes in agricultural production and
commodity price indices up to 2050, based on
detailed spatially explicit modelling of agricultural
products and trade.
metrics
to account
for nonCO2 gases
in national
emissions
targets
Commodity
price index
ESSAM
Calculates changes in economic activity in New
Zealand in 2020 and 2050, relative to ‘no climate
policy’, for prescribed economy-wide emissions
targets expressed in percentage relative to 1990.
global CO2
prices used in
emissions
trading
What is a General Equilibrium Model?
•Economic behaviour described by mathematical equations
household spending decisions
world demand for NZ exports
choice of fuels and factor inputs by industry
•Wider ambit than traditional cost-benefit analysis
•Economy divided into numerous industries (53)
•Track flow-on effects from one industry to another; eg
energy prices -> industry costs -> competitiveness -> exports->
labour demand -> household spending -> other industries
•Designed for “what if”? scenarios, not forecasting
•Able to accommodate government policies
(tax, welfare, spending on infrastructure, user pays, subsidies)
...and external shocks (oil price rises, protectionism, some aspects of
global warming)
Modelling Procedure
• Prepare “Business as Usual” scenario – not a forecast.
• Compare alternative policies and shocks against the BAU.
• Model strength is allocative efficiency.
• Macroeconomic closure: in all scenarios the following are held
constant at BAU levels:
 Total employment, wage rates endogenous.
 After tax rates of return, capital stock endogenous.
 BoP, real exchange rate endogenous.
 Fiscal surplus, personal income tax rates endogenous.
Scenario Structure
GWP
GTP
1
$35
18% 17%
2
$42
16% 18%
Agriculture sheltered
3
$77
14% 12%
3a
$88
14% 12%
Agriculture excluded
4
$77
14% 12%
4a
$88
14% 12%
World action
5 $150
94% 57%
6
$181
68% 61%
Agriculture sheltered
7 $333
51% 39%
7a $381
51% 39%
Agriculture excluded
8 $333
51% 39%
8a $381
51% 39%
Extra agricultural abatement
9 $126
94% 57%
10 $146
68% 61%
2050
2020
World action
Run No.
Dairy & Meat
price
CO2 price
Crops
price
Hybrid
2a $42
18% 17%
6a $181
94% 57%
2020 Scenarios
BAU
Scenario 1
Scenario 2
GWP
$35/t
GTP
$42/t
GTP
$42/t
1.1
1.0
2.6
0.3
0.8
0.9
1.3
2.6
0.3
0.7
Commodity
•
prices from
Scenario 1
1.0
1.4
2.8
•
0.3
0.7
MT
65.3
MT
MT
46.7
46.7
39.7
39.7
67.1 (-3.4%)
67.4 (-3.0%)
(% ∆ on BAU)
Private Consumption
Exports
Imports
GDP
RGNDI
MT
CO2e 1990 (GWP)
CO2e 1990 (GTP)
AAU (GWP)
AAU (GTP)
CO2e 2020 (GWP)
CO2e 2020 (GTP)
55.5
90.9
69.5
Forestry net
Net deficit
-as % of BAU
CH4 & N2O (GWP)
CH4 & N2O (GTP)
Scenario 2a
•
In Scenario 2, the CO2 price is higher than in
Scenario 1 due to the lower prices on nonCO2 gases.
The contention that a lower weight on
methane emissions would lower the cost to
New Zealand of meeting any given
proportionate emissions obligation, is not
supported by these results – at least not for
2020 and under the assumption that the world
as a whole applies a price on agricultural
emissions.
91.0 (0.1%)
-16.1
19.4
21.3%
44.9
23.4
Net gain to NZ in both scenarios (commodity
prices v carbon price & emissions
responsibility target).
-16.1
11.3
16.3%
49.2 (9.6%)
26.0 (10.9%)
• Under the ETS free allocation is intensity
-16.1 based => expansion in agricultural occurs
11.6 largely without that industry facing any
16.7%
additional emissions costs => cost on rest of
the economy buying emissions units from
26.2 (11.8%) offshore.
2020 Scenarios
BAU
Scenario 3
GWP
$77/t
Scenario 3a
GTP
$88/t
Scenario 4
GWP
$77/t
Scenario 4a
GTP
$88/t
Other countries shelter agr Agr non-CO2 excluded for all
emissions
countries
(% ∆ on BAU)
Private Consumption
Exports
Imports
GDP
RGNDI
MT
CO2e 1990 (GWP)
CO2e 1990 (GTP)
AAU (GWP)
AAU (GTP)
CO2e 2020 (GWP)
CO2e 2020 (GTP)
-0.2
1.1
1.4
-0.3
-0.2
0.6
-0.3
1.7
-0.2
0.4
0.5
-0.5
1.7
-0.3
0.4
MT
65.3
MT
MT
23.7
MT
46.7
23.7
55.5
90.9
69.5
86.1 (-5.3%)
44.9
23.4
47.8 (6.6%)
-0.2
• Comparing Scenarios 1 and 4
shows tells us:
20.1
39.9 (-16.2)
39.2 (-17.6)
-16.1
3.7
-16.1
3.0
63.7 (-8.4%)
-16.1
14.5
16.0%
• Comparing Scenarios 3 and 4
shows that NZ would benefit from
agriculture being excluded from
emissions obligations via
international agreement, if the
alternative is that the rest of the
world de facto excludes agriculture
but countries nominally retain
responsibility for those emissions.
20.1
39.7
Forestry net
Net deficit
-as % of BAU
CH4 & N2O (GWP)
CH4 & N2O (GTP)
-0.2
0.2
1.1
-0.4
-0.1
• Scenario 3: small macroeconomic
loss as carbon price is higher than
in Scenario 1 and commodity
prices are lower.
-16.1
7.8
11.2%
7.9%
6.5%
NA
26.0 (10.9%)
Welfare
(Low carbon
price, High
commodity
prices, Global
participation).
>
Welfare
(High
carbon
price,
Agriculture
excluded
globally)
NA
• Above also true with minor differences under GTP.
Scenario Structure
GWP
GTP
1
$35
18% 17%
2
$42
16% 18%
Agriculture sheltered
3
$77
14% 12%
3a
$88
14% 12%
Agriculture excluded
4
$77
14% 12%
4a
$88
14% 12%
World action
5 $150
94% 57%
6
$181
68% 61%
Agriculture sheltered
7 $333
51% 39%
7a $381
51% 39%
Agriculture excluded
8 $333
51% 39%
8a $381
51% 39%
Extra agricultural abatement
9 $126
94% 57%
10 $146
68% 61%
2050
2020
World action
Run No.
Dairy & Meat
price
CO2 price
Crops
price
Hybrid
2a $42
18% 17%
6a $181
94% 57%
2050 Scenarios
BAU
Scenario 5
GWP
$150/t
Scenario 6
GTP
$181/t
Scenario 6a
GTP
$181/t
Commodity
prices from
Scenario 5
(% ∆ on BAU)
Private Consumption
Exports
Imports
GDP
RGNDI
MT
• As before both scenarios show a
macroeconomic gain,
4.6
9.7
11.1
2.6
3.6
4.2
10.0
10.8
2.4
3.3
5.2
11.1•
12.6
2.9
4.1•
MT
65.3
MT
MT
46.7
46.7
23.4
23.4
CO2e 1990 (GWP)
CO2e 1990 (GTP)
AAU (GWP)
AAU (GTP)
CO2e 2050 (GWP)
147.9 173.9 (17.6%)
CO2e 2050 (GTP)
108.9
32.7
Net deficit
- as % of BAU
CH4 & N2O (GWP)
141.2
95.5%
79.0 114.7 (45.2%)
CH4 & N2O (GTP)
40.0
115.6 (6.1%)
but considerably higher than the
corresponding 2020 scenarios.
Thus the positive effect of the higher
commodity prices outweighs the
negative effect of the higher GHG
prices by even more in 2050 than in
2020.
• No benefit switching from GWP to
GTP, as carbon price is higher and the
121.1 (11.2%) increase in commodity prices is smaller
than under GWP.
92.2
84.7%
97.7
89.7%
57.2 (43.1%)
61.9 (54.7)
2050 Scenarios
BAU
Scenario 7
GWP
$333/t
Scenario 7a
GTP
$381/t
Other countries shelter agr
emissions
Scenario 8
GWP
$333/t
Scenario 8a
GTP
$381/t
Agr non-CO2 excluded for all
countries
(% ∆ on BAU)
Private Consumption
Exports
Imports
GDP
RGNDI
MT
CO2e 1990 (GWP)
CO2e 1990 (GTP)
AAU (GWP)
AAU (GTP)
CO2e 2050 (GWP)
147.9
CO2e 2050 (GTP)
108.9
-7.1
11.4
-3.0
-0.7
-5.6
-5.6
13.1
-0.5
0.0
-4.5
1.0
7.4
5.2
1.3
0.8
0.3
8.0
4.6
1.1
0.2
MT
65.3
MT
MT
23.7
MT
46.7
32.7
23.7
11.9
23.4
Net deficit
- as % of BAU
CH4 & N2O (GWP)
79.0
CH4 & N2O (GTP)
40.0
149.6 (1.1%)
11.9
56.5 (-21.5%)
109.4 (0.5%)
116.9
79.0%
94.1 (19.2%)
• Effects larger than for 2020.
86.0
79.0%
53.7 (34.3%)
56.2 (-22.0%)
44.6
64.8%
NA
44.3
64.3%
NA
• Scenario 3 v 1: ∆RGNDI = -0.9%
Scenario 7 v 5: ∆RGNDI = -9.2%
• i.e. the negative impact on NZ if
the RoW chooses not to impose a
price on agricultural emissions,
but NZ does so, is much greater
in 2050 than in 2020.
• Main reason is the higher carbon
prices.
• As in 2020, NZ would benefit from
agriculture being excluded from
emissions obligations via
international agreement, if the
alternative is that the rest of the
world de facto excludes
agriculture but countries nominally
retain responsibility for those
emissions.
Welfare
(Low carbon
price, High
commodity
prices, Global
participation).
• Such high carbon prices could lead to new abatement technology – Scenarios 9 &10
>
Welfare (High
carbon price,
Agr excluded
globally)
2050 Scenarios
Scenarios 9 & 10
GWP
World action
1
Variations
on Scenarios 5 and 6, with:
$35
18% 17%
2020
• Global mitigation technology which
Agricultureenteric
shelteredfermentation emissions
3
$77
reduces
by
14%e.12%
30% at a cost of US(2005)$70/t CO
2
2050
Agriculture
excluded participation with 4all
• Full
international
countries pricing all emissions. 14%
GTP
2
$42
16% 18%
Hybrid
2a $42
18% 17%
3a
$88
14% 12%
$77
12%
4a
$88
14% 12%
World action
5 $150
94% 57%
6
$181
68% 61%
Agriculture sheltered
7 $333
51% 39%
7a $381
51% 39%
Agriculture excluded
8 $333
51% 39%
8a $381
51% 39%
Extra agricultural abatement
9 $126
94% 57%
10 $146
68% 61%
6a $181
94% 57%
2050 Scenarios
BAU
Scenario 5
GWP
$150/t
Scenario 6
GTP
$181/t
Scenario 9
GWP
$126/t
Lower CH4
Scenario 10
GTP
$146t
Lower CH4
(% ∆ on BAU)
Private Consumption
Exports
Imports
GDP
RGNDI
MT
CO2e 1990 (GWP)
4.6
9.7
11.1
2.6
3.6
4.2
10.0
10.8
2.4
3.3
6.5
9.1
13.3
3.1
5.1
5.6
9.0
12.2
2.8
4.4
MT
MT
MT
MT
65.3
CO2e 1990 (GTP)
65.3
46.7
AAU (GWP)
32.7
AAU (GTP)
46.7
32.7
23.4
CO2e 2050 (GWP)
147.9
CO2e 2050 (GTP)
108.9
Net deficit
-as % of BAU
173.9 (17.6%)
79.0
CH4 & N2O (GTP)
40.0
152.3 (3.0%)
115.6 (6.1%)
141.2
95.5%
CH4 & N2O (GWP)
23.4
92.2
84.7%
114.7 (45.2%)
109.5 (0.5%)
119.6
80.9%
86.1
79.1%
92.5 (17.2%)
57.2 (43.1%)
50.7 (26.7%)
• Welfare gains (RGNDI)
40% and 30% higher
respectively – equal
contributions from the
new technology and the
lower carbon price.
• Somewhat smaller
under GTP v GWP.
• Ignoring new
abatement
technologies under
high carbon prices,
even if those
technologies are not
cost-free, could
significantly overstate
the welfare cost of
mitigating emissions.
Summary
• For most scenarios the
difference in horizon years
and carbon prices
completely dominates the
difference between GHG
exchange metrics.
• GTP metric generally mutes
the economic effect on NZ
in both directions
• Overall though, whether or
not other countries impose
an explicit price on
agricultural non-CO2
emissions has a bigger
effect on NZ’s economic
welfare than the choice of
GHG exchange metrics,
especially under higher
GHG prices.
• Only if agricultural non-CO2 emissions are totally excluded is the effect of GHG prices
comparable to the effect of the choice of GHG exchange metrics
- sort of trivial.
• However, the conversion factors do affect the global price on CO2.
ESSAM General Equilibrium Model (1)
Production Functions
• 2-level translog specification for factor demand:
[Eg: Ln(Y) = a0elt + a1Ln(X1) + a2Ln(X2)+a3Ln(X1)2 + a4Ln(X2)2+a5Ln(X1)Ln(X2)]
1. capital, labour, materials and energy
2. coal, oil, natural gas and electricity.
• Factor specific technological change.
• Typically total employment exogenous, wage rates endogenous.
• Typically total capital stock endogenous, (post-tax) rental rates exogenous.
• Relative factor prices fixed.
Intermediate Demand
• Composite commodity for material inputs.
• Imperfectly substitutable domestic and imported components.
Price Determination
• Price of industry output is determined by the cost of factor inputs (labour and capital), domestic
and imported intermediate inputs, and indirect taxes.
• No super-normal profits.
ESSAM General Equilibrium Model (2)
Private Consumption
• 8 HES, price and income elasticities in an AIDS framework.
• Industry by commodity conversion matrix translates the demand for commodities into
industry output requirements and also allows import-domestic substitution.
Government Consumption
• Usually exogenous level or fixed proportion of GDP.
• Usually exogenous budget balance - tax rates or transfer payments endogenous.
Stocks
• Fixed proportion of an industry’s output.
• Variation permitted in import-domestic composition.
Exports
International export demand functions with arguments:
• World prices
• Domestic prices
• Taxes & subsidies
ESSAM General Equilibrium Model (3)
Investment
Industry investment determined by:
• Rate of return.
• Depreciation.
• Consistent with implied rate of capital accumulation over the projection period.
• Investment by industry of demand converted into investment by industry of supply using a
capital input-output table.
• Import-domestic substitution between sources of supply.
Balance of Payments
• BoP = Investment less Savings, fixed as % of GDP.
• Endogenous real exchange rate.
Income-Expenditure Identity
• GDP (production) = GDP (expenditure) = GDP (income)
• Similarly, income and expenditure flows must balance between the five sectors identified
in the model – business, household, government, foreign and capital.
ESSAM General Equilibrium Model (4)
1
HFRG
Horticulture and fruit growing
26
EGEN
Electricity generation
2
MLVC
Mixed livestock and cropping
27
EDIS
Electricity transmission & supply
3
SHBF
Sheep and beef cattle farming
28
GASS
Gas supply
4
DAIF
Dairy cattle farming
29
WATS
Water supply
5
OAGR
Other farming and services to agriculture, hunting & trapping
30
BLDG
Construction
6
LOGG
Forestry & logging
31
TRDE
Wholesale & retail trade
7
FISH
Commercial fishing
32
ACCR
Accommodation, cafes & restaurants
8
COAL
Coal mining
33
ROAD
Road transport
9
OILG
Oil & gas extraction and exploration
34
WRAI
Water and rail transport
10
OMIN
Other mining & quarrying and services to mining
35
AIRS
Air transport, services to transport, storage
11
MEAT
Meat processing
36
COMM
Communication services
12
DAIR
Dairy product manufacturing
37
FIIN
Finance and Insurance
13
OFOD
Other food processing & manufacturing
38
OWND
Ownership of owner-occupied dwellings
14
TCFL
Textiles, clothing, footwear & leather mfg
39
OPRS
Other property services
15
WOOD
Log sawmilling, timber dressing & other wood product mfg
40
SCIT
Scientific research & technical services
16
PAPR
Paper and paper product manufacturing
41
COMP
Computer services
17
PPRM
Printing, publishing & recorded media
42
LAOB
Legal, accounting & other business services
18
PETR
Petroleum
43
GOVD
Govt administration & defence
19
CHEM
Chemical and chemical product manufacturing
44
SCHL
Pre-school, primary, secondary & other education
20
RBPL
Rubber and plastic product manufacturing
45
OEDU
Post-school education
21
NMMP
Non-metallic mineral product manufacturing
46
HOSP
Hospitals, nursing homes, aged accommodation & other community care
22
BASM
Basic metal manufacturing
47
OHLT
Medical, dental and other health services
23
FABM
Structural, sheet and fabric metal production manufacturing
48
MPRT
Cultural and recreational services
24
MACH
Machinery and equipment manufacturing
49
PERS
Personal and other services, waste disposal & sewerage systems
25
OMFG
Other manufacturing
ESSAM General Equilibrium Model (5)
Other model features
• Solves for relative prices, not absolute price level.
• Household sector in SAM divided into income quintiles.
• Model solved via a non-linear algorithm similar to Davidon Fletcher Powell
algorithm. Matrix algebra using GAUSS.
• Energy flows in both $ and in PJ.
• CO2 emission coefficients for energy combustion and industrial processes.
• CH4 and N2O emissions from pastoral agriculture (process emissions).
Caveats
• Aggregation bias (53 industries).
• Smooth production functions.
• No super-normal profits.
• Average income tax rates for household income quintiles.
• No endogenous technological change.
• Silent on transition costs and paths.