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Climate Policy within an International Emission Trading
System
Lars Bohlin
Department of Economics, Örebro University
[email protected]
Policy issues discussed in the paper
1. Should manufacturing have exemptions on CO2
taxes?
2. Should ETS installations have exemptions on CO2
taxes?
3. What should the relation be between the tax rate
on fossil fuel and the tax rate on electricity?
4. What is the optimal supply of allowances to
domestic firms?
5. What is the impact from the introduction of ETS?
Conclusions
1. Manufacturing should have the same tax rate on CO2
as households and services.
2. Even ETS installations should have the same tax
rate.
3. Before ETS optimal electricity tax is high, after it is 0.
4. The optimal supply of allowances is 0.
5. ETS gives small macroeconomic impacts, all ETS
industries gains, electricity producer gains a lot.
The model
An open economy computable general equilibrium
model:
A large amount of supply and demand equations for
different industries, households and government that are
solved simultaneously.
SAINT a Standard CGE model for Analysis of Indirect
Taxation.
Carbon leakage
Assumption 1 all adjustments in rest of the world are at the
production side
The change in foreign production = the change in net trade.
Net trade is multiplied with emission coefficients.
Assumption 2 100 % Carbon leakage in ETS industries.
What is the impact from the introduction of ETS?
Polluter gains principle
Optimal tax rates before ETS
Optimal tax rates after ETS
Prices in CGE models
Normalizing prices to one
Example: price of electricity: Data from Sweden 2001
Pulp and paper
households
Use GWh
21 662
41 127
Amount of money spent less
taxes million SEK
4 485
22 950
Normalised quantity unit
GWh
4.8
1.8
Equal unit tax rate
SEK per kWh
2.67
1
Prices in CGE models
The Bohlin method
Example: price of electricity: Data from Sweden 2001
Pulp and paper
households
Use GWh
21 662
41 127
Amount of money spent less
taxes (million SEK)
4 485
22 950
Average price less taxes
SEK per kWh
0.21
0.56
Equal unit tax rate per kWh
1
1
Prices in CGE models
The Bohlin method
VAT
Unit tax
Trade margin
Trade margin
Basic price
Pulp and paper
Basic price
households
Prices in CGE models
The Bohlin method
Fix Trade
Margin
VAT
Unit tax
Trade margin
Trade margin
Basic price
Pulp and paper
Basic price
households
Prices in CGE models
The Bohlin method
Fix Trade
Margin
VAT
Unit tax
Unit tax
Trade margin
Basic price
Pulp and paper
Trade margin
Basic price
households
Figure 2.1 Nest structure of the production functions
Gross output
Capital, labour, energy
and transport services
1.5
1.2
Capital
Other intermediates
Leontief
Labour, energy and
transport services
0.8
0.6
Energy and transport
services
Other energy
commodities
0.6
0.4
4
2
Light fuel
oil
Heavy fuel
oil
Diesel, gasoline and
transport services
Gas
Bio fuel
Diesel
Electricity
District
heating
Labour
2
1.5
Land
transports
Gasoline
Water
transports
Air
transports
The numbers in the ellipses refers to the elasticity of substitution between each aggregate. The top number in the long run elasticity
and the bottom number is the short run elasticity.
Figure 2.2 Nest structure of the consumption functions
Total household consumption
LES
Other manufactories
1.2
0.8
Other energy
commodities
Bio fuel
Light fuel
oil
Heavy fuel
oil
Diesel, gasoline and
transport services
4
2
Gas
Diesel
Electricity
District
heating
2
1.2
Other services
Land
transports
1.2
0.8
Gasoline
Water
transports
Air
transports
The numbers in the ellipses refers to the elasticity of substitution between each commodity. The top number is the long run elasticity
and the bottom number is the short run elasticity.