Download Does the Choice of Policy Measures in Annex B Countries

Choice of Policy Measures in Annex B Countries
and Impacts on Non-Annex B Countries
Workshop on Mitigation of Climate Change
Socio-Economic Impacts of Mitigation
Hotel Maritim, Bonn
W. David Montgomery, Ph.D.
Policy Approaches Under Consideration
• Broad market based approaches have received most attention in
studies of global economic impacts of climate change policy
– Cap and Trade systems
– Fuel or carbon taxes
• Increasing focus on “sectoral” measures in all Annex B countries
as policies are implemented
– Applied to specific economic sectors or industries
– Based on technical standards, sector-specific limits, or fiscal measures
• Questions this raises
– What are the impacts of “sectoral” or “bottom-up” measures on non-Annex
B countries?
– How do the impacts differ, depending on the sector regulated or instruments
chosen?
– What can be done to minimize adverse impacts?
Economy-Wide “Top-Down” Policies Include Emission
Trading and Uniform Taxes on Carbon Content
Prospective Region
Policy Category Policy Measure
Emissions
Economy wide cap & trade
Trading Schemes
Carbon tax
Sectoral emissions cap and
trade for electricity and
industrial sectors
Tax on all fuels based on
carbon content (essentially
the same as a tax on CO2
emissions)
North
America
EU
X
X
Select
Countries
X
X
Select
Countries
X
Rest of
World
Region Where Currently Implemented/
Proposed
North
America
EU
X
Select
Countries
Rest of World
Fiscal and Incentive Based Sectoral Policies Target
Specific Fuels or Sectors
Region Where Currently Implemented/
Proposed
Prospective Region
Policy Category
Fiscal Policies Subsidies &
Incentives
Policy Measure
* Rail and infrastructure
susbidies to reduce traffic
* Changes in operating
practices of vehicles fleets
incentives)
(e.g., anti-idling
credit
and production
Capital
for renewable electricity
Tax Credit for Bio-Fuels
Production; Tax exemption on
bio-fuels (or natural gas) at
pump
Fiscal Policies Taxes
Tax credit for hybrid, diesel,
fuel cell vehicles
Border taxes on imports from
non-complying countries
Oil import fee
Tax on transportation fuels
based on carbon content
North
America
EU
Rest of
World
North
America
EU
X
X
X
X
X
X
X
X
Select
Technologies
X
X
X
X
X
X
X
X
X
Rest of World
Select Countries
& Technologies
Select Countries
X
X
X
X
X
X
X
X
Bottom Up Measures Are Typically Sector and
Technology Specific
Region Where Currently
Implemented/ Proposed
Prospective Region
Policy Category
Command and
Control
Approaches
Policy Measure
Auto Standards for CO2
Emissions and tighter CAFÉ
Standards
Ban on new coal fired
powerplants
Voluntary/ Mandatory Sectoral
Carbon Intensity Reduction
Target
Mandatory Carbon per Capita
Reduction Target
Energy Efficiency
* Energy efficiency
requirments for lighting and
buidling materials in
commercial and industrial
sectors
Renewable Portfolio
Standards and Renewable
Trading Schemes
Mandatory biofuels
concentration by volume in
transportation fuels
Increasing Minimum
Appliance Efficiency
Standards
North
America
EU
X
X
Rest of
World
Select
Regions
Select
Countries
Canada
North
America
EU
Rest of
World
X
Select
Regions
Select
Countries
X
Select
Countries
X
X
Select
Countries
Select
Regions
X
Select
Countries
X
X
X
Select
States/
Regions
X
Select
Countries
X
X
Select
Regions
X
X
X
X
X
Spillover Effects Of Broad Market Based Approaches Are
Well-established
• Adverse impacts on most non-Annex B countries
– Reduction in Annex B income reduces demand for imports
– Increase in Annex B production costs increases real price of exports
– Result is adverse shift in terms of trade for developing countries
• Potentially beneficial impacts on exporters of energy-intensive
products
– Increase in cost of EIS production in Annex B increases demand and price
received for EIS exports
– Reduction in cost of energy imports due to lower world oil prices reduces
non-Annex B costs
– Result is potential terms of trade improvement for large EIS exporters
• Large adverse impacts on energy exporters
– Reduction in energy use reduces energy imports and world energy prices
– All energy exporting countries suffer adverse effects
• Patterns of spillover effects are governed by trade and
macroeconomic relationships
Paths for Spillover Effects Matter When Sectoral Policies
Are Considered
• Spillover effects arise from changes in Annex B
– Quantities of energy produced and consumed
– Costs of production of manufactured goods and some services
– Overall levels of economic activity
• These translate into terms of trade effects through
– Direct effects in energy markets
- Changes in demand for imported energy
– Substitution effects, mostly in markets for energy intensive goods
- Willingness to pay for imports
- Competitiveness of exports
– Income effects in all markets
- Overall level of demand for imports
Impacts of Sectoral Measures Depend on the Sectors
and Measures Involved
• Patterns of spillover effects are determined by which fuels and
sectors are targeted by a policy
Policy Target and Measure
Spillover Path
Oil
Imports
All sectors, Emission trading
Transportation Sector, Regulatory Policy
Industrial Sector, Regulatory Policy
Power Generation, Emission Cap or
Regulation
0
+ implies policy increases spillovers through indicated path
- implies policy decreases spillovers through indicated path
Industry
Cost
+
0
+
+
GDP
-
How Different Regions Are Impacted Depends on the
Path of Spillovers
• Changes in different pathways create different types of adverse
effects
Region Affected
Annex B
Oil exporters
Large, EIS exporter
Other non-Annex B
Spillover Path
Oil
imports
Industry
cost
GDP
+
+
+
+
-
-
+ implies change in path is beneficial to indicated country
- implies change in path is adverse to indicated country
The Choice of Sector Specific Policies Will Influence
Where Adverse Impacts Appear
• Adverse impacts depend on
– the sector that is regulated and
– how it is regulated
• Regulations that increase the cost of industrial sectors
– May benefit countries that export energy intensive goods to Annex B
countries
– Are likely to move terms of trade adversely to poorer countries that
export resources and agricultural products and import manufactured
goods
• Policies that reduce use of transportation fuels have large
adverse effects on oil exporters
– Direct reduction in consumption, oil imports and world oil price
– No possible favorable movements in the terms of trade
Using MS-MRT to Quantify Relative Effects of Sectoral
Policies
• MS-MRT is a computable general equilibrium trade model based
on the GTAP dataset
– Fully dynamic, forward-looking model with Armington trade structure
– Discussed in TAR and documented in Energy Journal and Journal of Energy
and Natural Resource Economics
– Being updated to GTAP6 data and current IEA World Energy Outlook
– Generic sectoral policy scenarios were explored to quantify the connections
between choice of policies and nature of adverse impacts
Regions in MS-MRT
usa
United States,
eur
Europe (EU 15)
jpn
Japan
eeu
Eastern Europe
rus
Russia
chn
China
ind
India
oec
Oil exporting countries
row
Rest of world
Sectors and goods
GAS
Natural gas
ELE
Electricity
OIL
Refined oil products
COL
Coal
CRU
Crude oil
EIS
Energy-intensive industries
TRN
Transportation
OTH
Other goods and services
Policy Scenarios for Meeting Kyoto Targets
• UET
"Universal emissions trade." This is the benchmark "low-cost" reference case in
which the Annex-B countries trade emissions within and across boundaries. Russia is capped
at BaU (no "hot-air") but participates in trading. US is assumed to remain outside the Kyoto
Protocol in 2015.
• NTR
"No international emissions trade." The Annex-B countries/regions each adopt
efficient carbon abatement programs with equalized abatement costs across all sources, yet
there is no trading between Annex-B countries. Sectoral shares of emission reduction in this
case provide the basis for scenarios that shift burden to specific sectors.
• TRN
"Regulated Transportation." No emissions trading and sectoral Annex-B instruments.
Regulatory measures require 10% greater emission reduction in transportation than NTR and
corresponding less in utilities and industry.
• UTL
"Regulated Utilities." Analogous to TRN, but with 10% greater share of emission
reduction for electric utilities.
• IND
"Regulated Industry." Analogous to UTL with 10% greater share of emission reduction
undertaken by both electric utilities and EIS.
• TRNX
“Transportation exempted." No emission limit on transportation, with compliance
achieved through greater reductions in other sectors.
Regional Economic Welfare Under Alternative Policies
Percent Change in Consumption in 2015 from Baseline
0.2
0.1
0
-0.1
NTR10 2015
UET10 2015
-0.2
TRN10 2015
UTL10 2015
-0.3
IND10 2015
TRNX 2015
-0.4
-0.5
-0.6
-0.7
chn
jpn
ind
usa
eur
oec
row
Implications of the Scenarios
• Across all scenarios, oil exporters suffer the largest
adverse effects
– Loss to oil exporters is consistently larger than impact on any Annex
B region
• The degree of harm to oil exporters is directly tied to
stringency of transportation sector policies
– Exempting transportation reduces harm close to zero
– Greater reliance on transportation measures increases harm
• Other Annex B countries are affected as expected
– Large exporters of energy-intensive goods may gain through
improved competitiveness, but these gains would be erased if
Annex B countries protect industries
– The rest of non-Annex B countries suffer adverse affects
Why Do Adverse Impacts Differ?
• Impacts depend on which sectors and fuels are targeted
– Policies with similar effects on energy use and demand for imports
have similar spillover effects
– Even if bottom-up policies are assumed to have no cost to the
Annex B economy, they have adverse spillover effects
– Reduction in oil imports lowers world oil price and causes harm to all
countries with significant oil exports
• Policies that target transportation increase harm to oil
exporters
• Impacts of sectoral policies that give preferential treatment
to Annex B industry need to be examined more carefully to
determine how non-Annex B competitors are affected
Remedies for Spillover Effects -- For Further Research
• Direct financial compensation
– Estimating compensation requires modeling terms of trade and oil
prices that would prevail “but-for” climate policies
– Oil exporters suffer the largest adverse effects
• Special tariff concessions
– Difficult to target to those with most harm
• Revision of fuel taxation
– Exempting transportation sector or replacing gasoline revenues with
carbon tax revenues reduces cost to EU countries, and
– Reduce adverse impacts on oil exporters
• Removal of coal subsidies
– Should improve economic efficiency in Annex B and lowers
emissions
– Would shift more of the emission reduction away from oil
consumption