Download Computable General Equilibrium (CGE) model

Can Climate Change Mitigation Policy
Benefit the Israeli Economy?
A Computable General Equilibrium Analysis
Ruslana Palatnik
Mordechai Shechter
Ruslana Palatnik
1
Outline




Introduction
Model
Data
Results





Simulation 1
Simulation 2
Simulation 3
Future development
Current research at FEEM
Ruslana Palatnik
2
Global warming process
CO2, CH4, N2O, CFCs, etc.
Ruslana Palatnik
Global Warming
Rachel Palatnik 3
3
Why Climate Change Mitigation?

A worldwide issue of concern
Globally coordinated action
UNFCCC – UN Framework Convention on
Climate Change:


1.
2.
3.
Created in 1992 and ratified by Israeli government
Objective of stabilizing atmospheric GHG concentration
The Kyoto protocol (1997)
- set emission limits on GHGs globally averaged by 6-7% relative
to 1990 level by 2008-2012

Post Kyoto agreement
Ruslana Palatnik
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The aims of the study:

Build a static CGE model for the Israeli economy,
with detailed analysis of energy flows
 Answer the following research questions:
1.
2.
3.
4.
5.
In what range would a carbon energy tax need to lie in order to
meet the Israeli Kyoto target for energy-related emissions of CO2
(7% reduction)?
What would be the impact of such a carbon tax on the Israeli
economy, welfare and emissions?
How would this carbon tax affect sectoral output, household
consumption patterns and demand for the various energy
commodities?
Perform sensitivity analysis
Check for double/employment dividend hypothesis.
Ruslana Palatnik
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The aims of the study
(Continued):

Two different schemes for recycling of the
revenue of the carbon tax to be
compared:
1.
2.

Proportional tax reduction
Reduction of the labor tax rate
Carbon emission trading market to be
analyzed and compared to carbon taxes
on the welfare maximization basis
Ruslana Palatnik
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Type of Model: Computable
General Equilibrium (CGE)

Computable: type of numerical simulation
model
– changes are introduced→ the resulting changes in
GDP, welfare, output, employment… are calculated.

General Equilibrium: supply = demand in all
markets simultaneously
– all intermediate demands are taken into account, and
effects that they have on other sectors are included.

Differs from traditional “partial equilibrium”
analysis where price and quantity adjustments
reach equilibrium in an isolated market. Ignoring
connections with other markets → a wider range
of effects are modeled.
Ruslana Palatnik
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Related Literature

Single country CGE for carbon mitigation
policy analysis: Böhringer and Rutherford (1997); Wissema and
Dellink (2006); André et. al (2003); Bovenberg et. al (2003); Dissou et al.
(2002)…

Multiple country CGE for carbon trade:
Whalley
and Wigle (1991); Viguier (2004); GTAP, GTAP-E, ORANI models…

Israel:

Conclusion: CGE model for Israeli economy
needed to analyze effects of economic
incentives for GHGs emission mitigation
Haim et al. (2007) ; Kan et al. (2007) ; Yehoshua and Shechter
(2003); Kadishi, et al. (2005); Avnimelech, Y. et al. (2000) ; Gressel et al.
(2000) …- partial equilibrium analysis.
Ruslana Palatnik
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Research structure
Developing a Static CGE Model
 Constructing the Benchmark (SAM)

Simulation 1: exogenous labour and capital
supply; Carbon tax / auctionable permits
recycled through proportional reduction of
existing taxes.
Simulation 2: sensitivity analysis.
Simulation 3: endogenous labour supply; Carbon
tax / auctionable permits recycled through labour
tax.
Ruslana Palatnik
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General model of the economy
Rest of the World
I/O matrix Energy
Technology
Supply of commodities
Intermediate
Goods
Producers
Consumers
Supply of capital, labor
indirect and
environmental
taxes
Supply of
public goods
transfers
Government
Ruslana Palatnik
Labor,
capital and
consumption
taxes
10
The Model: General Features
 Market
clearing in:
all markets
 goods and services
 production factors


Zero excess profits
 Balanced budget for each agent
Ruslana Palatnik
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The Model: Nesting Structure of
the Production Function

Production:
nested
production
structure using
CES family of
functions.
Y
S:0
M
KLE
S:0.85
L
KE
S:0.65
K
E
S:0.1
ELEC
FOS
S:0.5
COAL
OIL
S:0
CRUDE
Ruslana Palatnik
REFINED
12
Functional Form in Household
Sector
Household Welfare
max U = Cobb-Douglas (CD1 ,…, CD18)
s.t. Income constrain
 18
i 
max U   CDi 
 i

18
s.t.  pd i (1  tc )CDi   pd en * taen * CDen  pinvHouSav 
i 1
18
en


  (1  tl ) pl * L j  (1  tk ) pk * K j  TRN
j 1
Ruslana Palatnik
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Functional Form in International
Trade
International trade
Ai = CET(Di, EDi; σ=4)
Ai   i

1

Di  1   i 

1

EDi 


1


 1
1


Ai = CES(Mi, Σj {Y j,i}; σ=4) Ai   i  M i  1   i    Y j ,i 

 j

where   (  1) / 
Ruslana Palatnik



1

14
Functional Forms in Government
Consumption, Export and Investment
Government
maxG = Leontief(GD1 ,…,
GD18)
s.t. budget constraint
 GD 
max G  min  i 
 i 
18
18


s.t . ty j * Y j   ( tid j * IOi , j )  tl * L j  tk * K j 
j 1 
i 1

18
18
 (tc * CD )   (tm * M )   (ta
i
i 1

i
i 1
 pg * GD
i
i
en
* IOen, j ) 
en , j
 ( ta
en
* CDen )
i
 TPS  GovSur; where en  i
i
Export
E = Leontief (ED1 ,…,
ED18)
s.t. Balance of
payment=net import+
total net transfers abroad
 EDi 
max E  min 


 i 
Investment
I = Cobb-Douglas(ID1
,…, ID18)
s.t. Total investment+
stock change= Total
savings
 18

max I   IDi i 
 i

18
s .t . {(1  tmi ) M i - pfx * pxi * EDi }  BoPdef
i 1
18
s.t .
  pinv * ID  pa SD   HouSav  GovSur  BoPdef
i 1
i
i
i
Ruslana Palatnik
i
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Market clearing conditions

Domestic Demand
Di = Σj {IOi,j} + CDi + GDi + INVDi + SDi
 Armington Aggregate Supply
IMi + Σj {Y j,i} = Ai = Di + EDi
 Primary Factors
Σj Lj = LS; determines pl
Σj Kj = KS (fixed); determines pk
 Ensuring closed financial cycle:
S p  S g  Sb  Inv  StCh
 S p  Inv  StCh  S g  Sb
Ruslana Palatnik
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The Model: Taxation
1.
2.
3.
4.
5.
6.
7.
Indirect taxes less subsidies on products;
Taxes less subsidies on production;
Labor taxes;
Capital taxes;
Taxes on households;
Taxes on imports;
A counter-factual carbon energy tax or
tradable permits
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Social Accounting Matrix (SAM) Structure
Activities(j)
Commodities
(i)
Commodities
(i)
Intermediate
Factor
Inputs
Value-added
[L(j), K(j)]
Government
ROW
Invest
ment
Demand
ROW
Sales taxes,
tariffs, export
taxes
Direct
taxes
Imports
Net Capital
transfers to
ROW
Interhouseholds
transfers
expenditures
Exports
(f.o.b)
Supply
Factor
Transfers to
households
Investm
ent
Total
Demand
Transfers to
households
from ROW
RA
income
Transfers to
government
from ROW
G
income
Government
transfers to
ROW
Private
savings
Savings
Activity
Final
government
consumption
Factor
income
Factor income
to households
Producer
taxes TY(j)
Total
Activity
income
(Gross
Output)
Final
Household
consumption
Households
(RA)
Total
Households
Domestic
Supply
Activities
(j)
Government
(G)
Primary
income (L,K)
Households
expenditures
expenditures
Ruslana Palatnik
Government
savings
Government
expenditures
Foreign
exchange
outflow
Foreign
savings
Foreign
exchange
inflow
Savings
Invest
ment 18
Sectoral mapping
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
AFF
ROIL
COIL
COAL
MNF
ELE
WAT
CON
TRD
ASR
TRC
BIF
BAC
PAD
EDU
HWS
CSS
IBS
Agriculture
Refined petroleum
Extraction of crude petroleum and natural gas
Mining and agglomeration of hard coal
Manufacturing
Electricity
Water
Construction
Wholesale and retail trade repairs of vehicles
Accommodation services and restaurants
Transport storage and communications
Banking insurance and other financial institutions
Real estate renting and business activities
Public administration
Education
Health services and welfare and social work
Community social personal and other services
Imputed bank services and general expenses
Ruslana Palatnik
From 162-industry
aggregation tables
19
Data: Macro Social Accounting
Matrix (1995 in Million NIS)
Activities
Activities
Commodities
248,866.5
Factors
239,339.2
Government
Savings
Rest of
World
39,540.8
73,908.4
Savings
Rest of World
497,797.6
80,019.0
70,863.0
81,938.0
644,082.5
239,339.2
157,878.8
9,591.9
Total
497,798.2
162,396.0
Households
Total
Households
497,798.2
Commodities
Government
Factors
51,856.0
37,230.0
58,462.0
-1,913.0
106,743.7
7,552.0
5,110.4
36,809.0
644,082.8
239,339.2
263,198.4
166,771.0
Ruslana Palatnik
53,463.4
263,198.2
6,500.0
166,771.1
14,314.0
70,863.0
156,215.1
70,863.0
156,215.4
20
Data: Relative contribution of CO2 emissions by
sector due to fuel combustion and electricity
consumption in Israel in 1995 (Source: Avnimelech , 2002)
Sector
CO2 emission from
fuel combustion
CO2 emission from electricity
consumption
Total CO2
emissions
In ktons
In %
In ktons
In %
In % of
total
emissions
In ktons
In %
(I)**
(I/sumI)
(II)
(II/sumII)
(II/sumI)
(I+II)***
(I+II)/
/sumI)
Electricity
production
26,569
53.47%
1,515
5.70%
3.05%
1,515
3.05%
Manufacture
10,999
22.13%
7,705
29.00%
15.50%
18,704
37.64%
Transport
10,354
20.84%
0.00%
0.00%
10,354
20.84%
Residential
and
commercial
1,826
3.67%
14,772
55.60%
29.73%
16,544
33.29%
2,577
9.70%
5.19%
2,577
5.19%
26,569
100.00%
53.47%
49,694
100.00%
Agriculture
Total (sum)
49,694
100.00%
Ruslana Palatnik
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Data: Fuel consumption and CO2 emissions
by sectors. Source: Avnimelech (2002)
Sector
Electricity
production
Fuel cons'
(1000 tons)
CO2 (1000
tons)
LPG
Manufacture
Fuel cons'
(1000 tons)
CO2 (1000
tons)
124
366
Gasoline
Diesel Oil
137
435
Naphtha
Residual Fuel Oil
900
2,859
Fuel cons'
(1000 tons)
CO2 (1000
tons)
2,159
6,657
1,013
2,876
267
821
Residential and
commercial
Fuel cons'
(1000 tons)
CO2
(1000
tons)
404
1,194
199
632
769
2,031
6,252
Petrol. Coke
2,277
7,099
168
675
Tar
Coal
Transport
8,190
19,882
Total CO2
emissions
26,569
10,999
10,354
1,826
% of total
emission
53.47%
22.13%
20.84%
3.67%
Ruslana Palatnik
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Simulation 1: The Sectoral Impacts of
Carbon Taxes on the Israeli Economy
Carbon
Tax ($,
1995)
Agricult'
Refined
OIL
Crude
OIL
COAL
Manuf'
Electric'
Water
Transp'
Rest of
Econ'
Changes in Gross-of-Tax Commodity Prices (percent)
16⅔
-0.91
4.55
1.08
25.04
-0.01
5.54
1.61
0.10
-0.09
33⅓
-1.03
8.92
1.39
49.63
-0.06
9.70
2.12
0.21
-0.18
50
-1.09
13.34
1.76
74.27
-0.17
13.59
2.55
0.27
-0.28
66⅔
-1.15
17.78
2.14
98.92
-0.27
17.27
2.94
0.33
-0.37
Changes in Final Consumption by Commodity (percent)
16⅔
-0.53
-6.04
-4.84
-13.70
-0.50
-4.96
-1.31
-0.87
-0.15
33⅓
-1.04
-10.24
-9.31
-24.18
-0.98
-8.52
-2.10
-1.73
-0.30
50
-1.29
-13.83
-12.43
-32.01
-1.21
-11.41
-2.55
-2.20
-0.33
66⅔
-1.53
-17.14
-15.86
-38.28
-1.43
-13.99
-2.96
-2.65
-0.36
Changes in Demand for Coal by Sector (percent)
16⅔
-10.55
-15.48
-
-
-10.75
-14.36
-
-
-
33⅓
-19.32
-25.93
-
-
-19.35
-23.94
-
-
-
50
-25.92
-33.86
-
-
-25.82
-31.14
-
-
-36.91
-
-
66⅔
-31.25
-40.25
-
Ruslana Palatnik
-
-31.02
23
-
Simulation 1: The Sectoral Impacts of Carbon
Taxes on the Israeli Economy (continued)
Carbon
Tax($)
Agricul'
Refined
OIL
Crude
OIL
COAL
Manuf'
Electric'
Water
Transp'
Rest of
Econ'
Changes in Demand for Petroleum by Sector (percent)
16⅔
-2.17
-6.21
-
-
-2.39
-6.34
-4.30
-3.31
-1.34
33⅓
-5.44
-10.46
-
-
-5.48
-10.85
-7.07
-6.47
-2.58
50
-8.14
-14.10
-
-
-8.02
-14.61
-9.30
-9.07
-3.62
66⅔
-10.65
-17.46
-
-
-10.35
-18.00
-11.33
-11.49
-4.58
Changes in Demand for Electricity by Sector (percent)
16⅔
-2.33
-6.57
-
-
-2.75
-10.07
-4.39
-3.32
-1.41
33⅓
-5.63
-11.08
-
-
-6.03
-17.05
-7.14
-6.45
-2.64
50
-8.33
-14.91
-
-
-8.69
-22.59
-9.32
-9.01
-3.67
66⅔
-10.81
-18.42
-
-
-11.11
-27.28
-11.29
-11.37
-4.60
Changes in Sectoral Activity Levels (percent)
16⅔
-0.24
-5.45
-
-
-1.24
-6.34
-2.71
-0.67
-0.16
33⅓
-0.72
-9.79
-
-
-1.68
-10.43
-3.78
-1.34
-0.32
50
-0.90
-13.52
-
-
-1.82
-13.71
-4.42
-1.63
-0.32
66⅔
-1.08
-16.97
-
-1.95
Ruslana
Palatnik
-16.61
-5.00
-1.91
-0.33
24
Simulation 1: Sectoral Marginal Abatement
Cost Curves for Israel.
70.00
60.00
Carbon tax ($ 1995)
50.00
40.00
30.00
MAC_Households
MAC_Rest of Economy
MAC_Electricity
MAC_Manufacture
MAC_Transport
20.00
10.00
0.00
0
1000
2000
3000
4000
5000
6000
7000
8000
CO2 emission reduced (Kton)
Ruslana Palatnik
25
Simulation 1: Impact of Carbon
40000
Rest of economy
Agricalture
20000
30000
Refined oil
Transport
Manufacture
10000
RA
Electricity
0
Carbon Emission
50000
tax on sectoral emission
0
16.67
33.33
50
66.67
Carbon Tax
Ruslana Palatnik
26
Simulation 1: The Aggregate
Economic Impacts of Carbon Taxes
Carbon
CO2
CO2
CO2
tax (1995 Emission Abateme Abateme
$)
(ktons) nt (ktons) nt (%)
Welfare
Change
from
Benchm’
(%)
GDP
Carbon
Change
Tax
from
Payments
Benchm’ Share of
(%)
GDP (%)
0
49,748.00
-
-
-
-
-
16⅔
45,158.11
4,589.89
9.22%
-0.27%
-0.31%
0.18%
33⅓
42,155.29
7,592.71
15,26%
-0.54%
-0.61%
0.33%
50
39,804.96
9,943.04
19.99%
-0.72%
-0.79%
0.47%
37,802.36 11,945.65
24.01%
-0.89%
-0.96%
0.60%
66⅔
Ruslana Palatnik
27
Simulation 1: The Sectoral Impacts of
Auctionable Permits on Israeli Economy
Permit Price
($, 1995)
CO2 Emissions
(ktons)
CO2
Abatement
(ktons)
Welfare Change
from Benchmark
(%)
GDP Change
from
Benchmark (%)
9.03
46,265.6
3,482.36
-0.09%
-0.12%
Changes in
Commodity
Prices (%)
(%)Changes
in Final
Consumption
by
Commodity
Changes in Sectoral
Activity Levels (%)
Sectoral
Emission
Abatement
(kton)
Manufacture
-0.08
-0.21
-0.25
86.26
Electricity
2.16
-1.99
-2.33
1678.49
Refined Oil
2.04
-2.21
-2.25
123.91
Coal
11.5
-6.08
-
-
Transport
0.05
-0.32
-0.43
510.49
Rest of Econ.
-0.04
-0.06
-0.08
782.96
Households
-
-
-
300.26
Ruslana Palatnik
28
Simulation 2: Nesting Structure of 3
Production Functions Modeled.
(KL)E Nest, Finish
elasticities
(van der Werf , 2007)
Initial
Production
Function
Y
NE
M
S:0
Y
S:0
M
S:0.85
S:0
KLE
M
S:0.5
LK
S:0.5E
KE
E
Rest nests
unchanged
L
KLE
S:0.25
LK
S:0.5
S:0.65
K
Y
S:0
LKE
KLE
L
(KL)E Nest, Italian
elasticities
(van der Werf , 2007)
E
S:0.5
K
L
Rest nests
unchanged
Ruslana Palatnik
K
Rest nests
unchanged
29
Simulation 2: Marginal Abatement Curves of the Israeli
Economy for Various Production Function Definitions
Carbon Tax (NIS, 1995)
200
MAC_A
MAC_B
MAC_C
150
100
50
0
35,000
40,000
45,000
50,000
Total Emission (ktons)
Ruslana Palatnik
30
Simulation 2: The Aggregate Economic Impacts of
Carbon Taxes and Auctionable Permits via Production
Function definition
Production Function A
Carbon tax
($, 1995)
16⅔
66 ⅔
CO2
Emission 45,158 37,802
(ktons)
CO2
Abatm.
(% )
9.23 % 24.0 %
Permit
9.03
46,266
Production Function B
Carbon tax
16⅔
66 ⅔
45,966 39,742
Permit
Production Function C
Carbon tax
Permit
14.2
16⅔
66 ⅔
21
46,266
46,837
42,039
46,266
7%
7.61%
20.1%
7%
5.85 %
15.5%
7%
Welfare
Change
(%)
-0.27
-0.89
-0.09
-0.11
-0.50
-0.10
-0.08
-0.36
-0.11
GDP
Change
(%)
-0.31
-0.96
-0.12
-0.14
-0.57
-0.13
-0.12
-0.49
-0.16
Ruslana Palatnik
31
Simulation 3: Economic Impacts of
Carbon Tax (Unemployment Case)
Carbon
Welfare
Real GDP
Labour/
CO2
CO2
Untax
Change
Change
Capital
Emissions Abate
employ
(NIS,
from
from
Price Index
(ktons)
ment
ment
1995)
Benchmark Benchmark
Change
-
49,748.00
-
-
-
-
6.90%
16⅔
46,663.13
6.2%
-0.05%
-0.08%
0.2%
5.96%
33⅓
45256.75
9.0%
-0.14%
-0.21%
0.5%
5.32%
50
43652.38
12.3%
-0.24%
-0.33%
0.7%
5.11%
67⅔
41765.44
16.0%
-0.34%
-0.45%
1.0%
5.01%
Permit
Price ($
21⅔)
46,265.6
7%
-0.08%
-0.12%
0.3%
5.79%
Ruslana Palatnik
32
Simulation 3: Sensitivity of economic indicators to
changes of the elasticity of substitution between labourcapital and energy composites: 7% abatement target.
Welfare
Real GDP
Permit Price
Change
UnS:LKE
Change from
($, 1995)
From
employment
Benchmark
Benchmark
0
34.21
-0.30%
-0.40%
6.09%
0.25
21⅔
-0.08%
-0.12%
5.59%
0.50
15.57
0.03%
0.02%
5.39%
0.75
11.98
0.04%
0.10%
5.29%
1.00
9.46
0.05%
0.15%
5.19%
Ruslana Palatnik
33
Future Analysis









Updated SAM (in 2009 publication for I-O table 2006);
Natural gas – energy resource;
Check for additional energy tax revenues recycling
schemes;
Dynamic CGE model;
Sector-specific factors where appropriate (e.g. in
agriculture, energy);
Differentiate factors (e.g. skilled versus unskilled labour);
Include other greenhouse gases;
Introduce imperfect competition in energy sector;
Introduce technological change.
Ruslana Palatnik
34
Current Research (FEEM)

ICES: Intertemporal
Equilibrium System



Computable
World Climate Change adaptation costs and
benefits focusing on agricultural sector
Biofuels as Climate Change mitigation policy
Water issues
Ruslana Palatnik
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Venezia, - Italy
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+39 | 041 | 2711483
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