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Economic Effects of Co-ordinated and
Non-co-ordinated Permit Schemes in
an EU-Bubble
An Applied General Equilibrium Analysis
with the GEM-E3 Model
Tobias F.N. Schmidt, ZEW
ZEW
Overview of the Presentation




What is the issue to be analysed?
What are the characteristics of the
GEM-E3 model?
What answers can the model give with
respect to the issue analysed?
Which conclusions can be drawn?
ZEW
What is the issue?



Burden sharing agreement of the EU Council
of Ministers versus trading of emission
rights.
What are the economic consequences of
sticking to domestic action?
What are the impacts of trading of emission
rights across the EU?
ZEW
Table 1: EU Burden Sharing Agreement
Reduction target
(to 1990)
Un. Kingdom
-13%
-8%
-21%
-21%
0%
0%
25%
13%
-6%
-6%
-28%
27%
15%
4%
-10%
EU-15
-8%
Austria
Belgium
Germany
Denmark
Finland
France
Greece
Ireland
Italy
Netherlands
Luxemburg
Portugal
Spain
Sweden
ZEW
Characteristics of GEM-E3






CGE-model for studying economy-energyenvironment interactions
Multi-country, multi-sectoral model
(14 EU-countries, 18 sectors)
Open economies linked through bilateral trade
flows
Social accounting framework
Recursively dynamic
Standard version: perfect competition
ZEW
Production Structure in GEM-E3
X
(production)
LEM
K
(labour, energy, material)
(capital)
EL
(electricity)
LFM
(labour, fuels, material)
F
L
M
(fuels)
(labour)
(material)
F1
F2
F3
(coal)
(oil)
(gas)
M1
.......
M 14
(non-energy inputs)
ZEW
Consumption in GEM-E3
expected income
LJ
C
S
(consumption expenditure)
(leisure)
Z
Q
(durables)
z1
(cars)
L
z2
(savings)
(non-durables)
z3
(electrical
(heating
appliances) systems)
q1
.............
q11
(11 non-durable goods)
linkage
(labour supply)
ZEW
Baseline and Scenario Assumptions


Baseline
- 1.8% to 2.5% annual growth in the EU
- increase of world energy prices
General scenario assumptions
- 8% reduction of EU-wide 1990 CO2
emissions until 2012
- Realisation through tradable emission
permit schemes
- Reduction & trade of permits realised
during the budget period 2008-2012
ZEW
Specification of the Permit Scheme




Initial allocation of permits: free of charge
according to burden sharing agreement of the
Council of Ministers.
Grandfathering across firms and households
within the countries.
Marginal decision of polluters based on
opportunity costs
Rents related to free-of-charge allocation of
permits increase capital income
ZEW
Policy Scenarios


Policy 1: No Trade
non-co-ordinated domestic actions:
national permit schemes
Policy 2: Free Trade
co-ordinated action:
EU-wide permit scheme, i.e. free trade of
permits across member states
ZEW
Table 2: Total Atmospheric Emissions in EU-14 in 2012
No Trade
Free Trade
CO2 ( to baseline)
-42.4%
-42.4%
CO2 (to 1990)
-8.0%
-8.0%
NOX (to 1990)
-8.9%
-10.8%
SO2 (to 1990)
-19.2%
-22.8%
VOC (to 1990)
1.7%
0.9%
-30.8%
-30.4%
PM (to 1990)
ZEW
Table 3: Macroeconomic Aggregates for EU-14 in 2012
No Trade
Free Trade
Gross Domestic Product
Employment
Private Investment
Private Consumption
Domestic Demand
Exports in volume
Imports in volume
Intra EU trade
Energy consumption in volume
CO2 permit price (ECU'85/tn CO2)
Marginal abatement cost (ECU'85/tn C)
-2.66%
-1.46%
-1.24%
-2.75%
-4.27%
-9.84%
-7.17%
-9.30%
-34.62%
287
1054
-2.43%
-1.43%
-1.15%
-2.34%
-3.96%
-9.80%
-7.06%
-9.36%
-34.29%
267
979
Economic Welfare*
Total Welfare* (incl. environment)
-0.82%
-0.70%
-0.61%
-0.49%
* equivalent variation in % of base year GDP, cumulative
ZEW
Table 3: CO2 Emissions and Permit Price in 2012
No Trade
Free Trade
CO2 (to 1990)
Permit Price
(ECU/tCO2)
CO2 (to 1990)
Permit Price
(ECU/tCO2)
Un. Kingdom
-13.4%
-7.9%
-21.4%
-21.4%
-0.4%
-0.4%
24.4%
12.5%
-6.9%
-6.4%
26.4%
14.5%
3.5%
-10.4%
235
230
506
329
151
188
53
144
259
132
42
144
287
320
-16.7%
-11.6%
-3.7%
-15.8%
-17.0%
-9.7%
-19.3%
-5.0%
-7.9%
-24.2%
-28.2%
-4.1%
5.4%
-5.7%
267
267
267
267
267
267
267
267
267
267
267
267
267
267
EU-14
-8.0%
287
-8.0%
267
Austria
Belgium
Germany
Denmark
Finland
France
Greece
Ireland
Italy
Netherlands
Portugal
Spain
Sweden
ZEW
Table 4: CO2 Emissions and GDP in 2012
No Trade
Free Trade
CO2 (to 1990)
GDP
CO2 (to 1990)
GDP
Un. Kingdom
-13.4%
-7.9%
-21.4%
-21.4%
-0.4%
-0.4%
24.4%
12.5%
-6.9%
-6.4%
26.4%
14.5%
3.5%
-10.4%
-2.6%
-3.3%
-4.2%
-3.1%
-1.6%
-1.5%
-1.5%
-2.7%
-2.4%
-2.1%
-0.7%
-1.2%
-1.5%
-3.2%
-16.7%
-11.6%
-3.7%
-15.8%
-17.0%
-9.7%
-19.3%
-5.0%
-7.9%
-24.2%
-28.2%
-4.1%
5.4%
-5.7%
-2.7%
-3.5%
-2.3%
-2.5%
-2.4%
-1.9%
-5.6%
-4.3%
-2.4%
-3.3%
-4.3%
-1.9%
-1.3%
-2.7%
EU-14
-8.0%
-2.7%
-8.0%
-2.4%
Austria
Belgium
Germany
Denmark
Finland
France
Greece
Ireland
Italy
Netherlands
Portugal
Spain
Sweden
ZEW
Table 5: Comparing Free Trade and No Trade
Free Trade to No Trade
Austria
Belgium
Germany
Denmark
Finland
France
Greece
Ireland
Italy
Netherlands
Portugal
Spain
Sweden
Un. Kingdom
EU-14
CO2 reduction
GDP
+
+
+
+
+
+
+
+
+
+
-
+
+
+/+
+
same
+
ZEW
Reasoning



Buying or holding permits increases input
prices for primary energy inputs
--> distortion in intermediate demand.
Rents related to free-of-charge allocation and
sale of permits increase capital income.
The distortionary effect of the former exceeds
the re-distortion achieved by the latter.
ZEW
Table 6: Trade of Permits and Ceilings
Austria
Belgium
Germany
Denmark
Finland
France
Greece
Ireland
Italy
Netherlands
Portugal
Spain
Sweden
Un. Kingdom
Buyers(+) & Sellers(-)
of permits
Trade in %
of ceiling
+
+
+
+
-14%
-15%
79%
25%
-66%
-37%
-156%
-66%
-4%
-74%
-193%
-69%
7%
20%

Ceilings:
EU proposal

formula:
Ceil  5% 
( Em1990  5)  (ass.amount )
2
ZEW
Conclusions I



Free trade of permits reduces the overall mitigation
cost for the EU.
If trade is on the level of private entities, there are compared to the no trade case - winners and losers
of free trade: Net-buyers win, net-sellers lose.
Considering opportunity costs for holding permits
produces distortions that are not fully compensated
by the rents linked to the sale of permits
(reasoning: public finance).
ZEW
Conclusions II



An outcome based allocation rule of the
overall gains could make all countries better
off.
The issue of ceilings is of minor importance
within the EU-bubble.
Under free trade of permits, only Greece and
Portugal (net-sellers) would exceed the
amount allowed by the EU proposal.
ZEW
Table 7: CO2 Target and Actual Effort in 2012
No Trade
CO2 (to 1990)
CO2
(to
baseline)
Un. Kingdom
-13.4%
-7.9%
-21.4%
-21.4%
-0.4%
-0.4%
24.4%
12.5%
-6.9%
-6.4%
26.4%
14.5%
3.5%
-10.4%
-41.7%
-39.6%
-51.2%
-49.4%
-40.3%
-34.5%
-27.9%
-33.8%
-42.3%
-36.5%
-26.8%
-33.0%
-35.2%
-44.6%
EU-14
-8.0%
-42.4%
Austria
Belgium
Germany
Denmark
Finland
France
Greece
Ireland
Italy
Netherlands
Portugal
Spain
Sweden
ZEW