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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