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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)
    Austria            -13%
    Belgium             -8%
    Germany            -21%
    Denmark            -21%
    Finland             0%
    France              0%
    Greece             25%
    Ireland            13%
    Italy               -6%
    Netherlands         -6%
    Luxemburg          -28%
    Portugal           27%
    Spain              15%
    Sweden              4%
    Un. Kingdom        -10%
    EU-15              -8%             ZEW
          Characteristics of GEM-E3

   CGE-model for studying economy-energy-
    environment 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)


  K                          LEM
(capital)           (labour, energy, material)


                 EL                          LFM
             (electricity)            (labour, fuels, material)



                L                                 F                         M
             (labour)                            (fuels)                (material)


                                        F1         F2       F3     M1     .......    M 14
                                      (coal)       (oil)   (gas)    (non-energy inputs)

                                                                                            ZEW
                Consumption in GEM-E3

                                      expected income



    LJ                                         C                                        S
  (leisure)                          (consumption expenditure)                       (savings)

                           Z                                        Q
                       (durables)                                (non-durables)

               z1         z2         z3                  q1          .............   q11
              (cars)   (electrical (heating                    (11 non-durable goods)
                        appliances) systems)



   L                                                 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%
    PM (to 1990)           -30.8%     -30.4%




                                                        ZEW
Table 3: Macroeconomic Aggregates for EU-14 in 2012


                                                            No Trade   Free Trade
 Gross Domestic Product                                      -2.66%      -2.43%
 Employment                                                  -1.46%      -1.43%
 Private Investment                                          -1.24%      -1.15%
 Private Consumption                                         -2.75%      -2.34%
 Domestic Demand                                             -4.27%      -3.96%
 Exports in volume                                           -9.84%      -9.80%
 Imports in volume                                           -7.17%      -7.06%
 Intra EU trade                                              -9.30%      -9.36%
 Energy consumption in volume                               -34.62%     -34.29%
 CO2 permit price (ECU'85/tn CO2)                              287         267
 Marginal abatement cost (ECU'85/tn C)                        1054         979

 Economic Welfare*                                           -0.82%     -0.61%
 Total Welfare* (incl. environment)                          -0.70%     -0.49%

 * equivalent variation in % of base year GDP, cumulative
                                                                                    ZEW
Table 3: CO2 Emissions and Permit Price in 2012

                         No Trade                    Free Trade
                              Permit Price                   Permit Price
              CO2 (to 1990)                  CO2 (to 1990)
                              (ECU/tCO2)                     (ECU/tCO2)
Austria         -13.4%              235        -16.7%             267
Belgium          -7.9%              230        -11.6%             267
Germany         -21.4%              506         -3.7%             267
Denmark         -21.4%              329        -15.8%             267
Finland          -0.4%              151        -17.0%             267
France           -0.4%              188         -9.7%             267
Greece          24.4%                53        -19.3%             267
Ireland         12.5%               144         -5.0%             267
Italy            -6.9%              259         -7.9%             267
Netherlands      -6.4%              132        -24.2%             267
Portugal        26.4%                42        -28.2%             267
Spain           14.5%               144         -4.1%             267
Sweden           3.5%               287         5.4%              267
Un. Kingdom     -10.4%              320         -5.7%             267
EU-14            -8.0%              287         -8.0%             267       ZEW
        Table 4: CO2 Emissions and GDP in 2012

                         No Trade                   Free Trade

              CO2 (to 1990)         GDP     CO2 (to 1990)        GDP

Austria         -13.4%              -2.6%     -16.7%         -2.7%
Belgium          -7.9%              -3.3%     -11.6%         -3.5%
Germany         -21.4%              -4.2%      -3.7%         -2.3%
Denmark         -21.4%              -3.1%     -15.8%         -2.5%
Finland          -0.4%              -1.6%     -17.0%         -2.4%
France           -0.4%              -1.5%      -9.7%         -1.9%
Greece          24.4%               -1.5%     -19.3%         -5.6%
Ireland         12.5%               -2.7%      -5.0%         -4.3%
Italy            -6.9%              -2.4%      -7.9%         -2.4%
Netherlands      -6.4%              -2.1%     -24.2%         -3.3%
Portugal        26.4%               -0.7%     -28.2%         -4.3%
Spain           14.5%               -1.2%      -4.1%         -1.9%
Sweden           3.5%               -1.5%      5.4%          -1.3%
Un. Kingdom     -10.4%              -3.2%      -5.7%         -2.7%
EU-14            -8.0%              -2.7%      -8.0%         -2.4%     ZEW
Table 5: Comparing Free Trade and No Trade

                     Free Trade to No Trade

                  CO2 reduction      GDP

    Austria            +              -
    Belgium            +              -
    Germany            -              +
    Denmark            -              +
    Finland            +              -
    France             +              -
    Greece             +              -
    Ireland            +              -
    Italy              +             +/-
    Netherlands        +              -
    Portugal           +              -
    Spain              +              -
    Sweden             -              +
    Un. Kingdom        -              +
    EU-14             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


              Buyers(+) & Sellers(-)   Trade in %
                   of permits           of ceiling
Austria                 -                 -14%
                                                        Ceilings:
Belgium                 -                 -15%           EU proposal
Germany                 +                  79%
Denmark                 +                  25%
Finland                 -                 -66%
France                  -                 -37%
                                                        formula:
Greece                  -                -156%
Ireland                 -                 -66%                   ( Em1990  5)  (ass.amount )
                                                     Ceil  5% 
Italy                   -                  -4%                                  2
Netherlands             -                 -74%
Portugal                -                -193%
Spain                   -                 -69%
Sweden                  +                   7%
Un. Kingdom             +                  20%

                                                                                        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
                    CO2 (to 1990)
                                      baseline)
      Austria         -13.4%           -41.7%
      Belgium          -7.9%           -39.6%
      Germany         -21.4%           -51.2%
      Denmark         -21.4%           -49.4%
      Finland          -0.4%           -40.3%
      France           -0.4%           -34.5%
      Greece          24.4%            -27.9%
      Ireland         12.5%            -33.8%
      Italy            -6.9%           -42.3%
      Netherlands      -6.4%           -36.5%
      Portugal        26.4%            -26.8%
      Spain           14.5%            -33.0%
      Sweden           3.5%            -35.2%
      Un. Kingdom     -10.4%           -44.6%
      EU-14            -8.0%           -42.4%
                                                      ZEW

								
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