Jan-June 2006, visiting fellow at the CAS, Norwegian Academy of Sciences and Letters, Oslo

Transcription

1 LECTURE II CARBON LEAKAGE AND INTERNATIONAL TECHNOLOGY SPILLOVERS Venice, July 1, 2006 Reyer Gerlagh (with Onno Kuik for CGE analysis) IVM, Institute for Environmental Studies, Vrije Universiteit Amsterdam Jan-June 2006, visiting fellow at the CAS, Norwegian Academy of Sciences and Letters, Oslo September , Chair in Environmental Economics University of Manchester, UK EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 1 / 42

2 Topic: Effect of ETC on carbon leakage LECTURE II. SUBJECT AND OBJECTIVES Method: Link CGE to simple formal analysis. Identify two hypotheses explaining Carbon Leakage, Pollution Haven Channel and Energy Market Channel, and see which of the two explains CGE results. Then answer: what is mechanism underlying carbon leakage in CGEs? What should one expect that the effect of ETC on Carbon Leakage will be? (Add endogenous technological change with international spillovers to a simple formal model.) Include ETC in CGE and compare Tools: Endogenous technological change (ETC) in CGEs: a constructive suggestion for static CGEs EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 2 / 42

3 CARBON LEAKAGE; WHAT IS IT? Some countries care more about climate change (EU, Canada) than other countries (US, China) (i.e. the representative of the citizens do) Thus, some countries want to set tighter emission reduction plans than others. In the extreme, some countries abate (EU), others (US?) don t. Because of trade, polluting industries (energy-intensive sectors such as chemical) can move their factories from abating to non-abating countries, and still sell their products to the same consumers (Pollution haven hypothesis). The abating countries see their reduction efforts + jobs + income leak away. EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 3 / 42

4 CARBON LEAKAGE, WHY IS IT A PROBLEM? It makes environmentalists anti-globalists: Trade is bad! Free market is bad! It makes Bush say: Climate policy gives away our jobs without reaching anything And they have a point It makes climate change policy ineffective and costly. Moreover, it increases the free-rider pay-off for countries not joining an international environmental agreement (Kyoto), reducing the stability of such. Thus it makes effective global climate change policy less likely EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 4 / 42

5 CARBON LEAKAGE, SECOND THOUGHTS Carbon leakage, a substantial problem, but the Pollution Haven Hypothesis misses some points Moving polluting industries internationally is just one channel for carbon leakage. The interaction between global demand and supply on the energy commodities market is another (more important) channel. Even without industries moving, abatement in some countries will lead to lower demand and energy commodity prices on the world market, and thus to increasing demand in non-abating countries. For an inelastic energy commodity (a resource in fixed supply), leakage would be 100% by definition. How elastic and international in supply are gas, oil, and coal? Two hypotheses: Pollution Haven Channel versus Energy Market Channel, which is true? EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 5 / 42

6 CARBON LEAKAGE THROUGH THE GLOBAL ENERGY MARKET, INITIAL EQUILIBRIUM D AB,0 p 0 A 0,B 0 W 0 S W D W,0 E A =E B EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 6 / 42 E W

7 CARBON LEAKAGE THROUGH THE GLOBAL ENERGY MARKET, CTD D A,1 D AB,0 p 0 A 0,B 0 W 0 S W p 1 A 1 B 1 W 1 D W,1 D W,0 ΔE A ΔE B ΔE W EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 7 / 42

8 A SIMPLE REPRESENTATION OF TWO HYPOTHESES FOR CARBON LEAKAGE Pollution Haven Channel World market Domestic market Carbon-energy X Energy-intensive intermediates X Energy Market Channel World market Domestic market Carbon-energy X Energy-intensive intermediates X EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 8 / 42

9 HOW TO ASSESS CARBON LEAKAGE AND THE 2 HYPOTHESES No history of climate change policy, thus no empirical measurement of carbon leakage. and no empirical test of relative importance Energy-Market Channel versus the Pollution Haven Channel. We need simulations e.g. CGEs to estimate its carbon leakage and to test two hypotheses. A note: Using a model to test hypotheses is shaky; use results with caution. But dependence of results on assumptions is not restricted to CGEs. Many empirical tests also rely on model assumptions. EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 9 / 42

10 CARBON LEAKAGE, EFFECTS OF ENDOGENOUS TECHNOLOGICAL CHANGE Economies worldwide share the technologies they use for production, what is the effect on carbon leakage of a common technology pool? We may use simple formal model to test this relationship Results may depend on whether simple model is based on Pollution Haven versus Energy Market Channel Use CGE to test two hypotheses and to compare formal model results with CGE results EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 10 / 42

11 LITERATURE, CGE MODELS Important elements of CGE affecting the carbon leakage rate (Felder and Rutherford 1993, Burniaux and Oliveira-Martins 2000, Böhringer et al. 2000, Bollen et al. 2000, Paltsev 2001, Babiker 2005): The integration of international markets for energy commodities (one global supply function). Higher leakage for lower global fossil fuel supply elasticity Higher leakage for strong international competition in energy-intensive goods. Two candidate parameters for explaining results: elasticity of carbon energy supply & competition on international market for intermediate and final goods New developments: Strategic behaviour, imperfect market, technological change will set the stage for the next wave of CGE literature EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 11 / 42

12 SUMMARY OF CGE MODELS ON CARBON LEAKAGE CLR ν ψ MIT-EPPA (Babiker and Jacoby, 1999) G-Cubed (McKibbin and Wilcoxen, 1999) Light et al. (1999) GREEN (Burniaux and Oliveira Martins, 2000) WorldScan (Bollen et al. 2000) GTAP-EG (Paltsev 2001) GTAP-E (Burniaux et al. 2002) MIT-EPPA (Babiker 2005) MIT-EPPA (Babiker 2005) GTAP-E (Kuik 2006) ν = Armington elasticity between imported and domestic goods ψ = carbon-energy supply elasticity * source: Kuik (2005) with Babiker (2005) and own calculations added EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 12 / 42

13 LITERATURE: ENVIRONMENTAL POLICY AND TECHNOLOGY Empirical evidence for (i) energy savings innovations following changes in energy prices, (ii) international technology diffusion for environmental technologies, and for (iii) substantial international R&D spillover (Coe and Helpman 1995, Lanjouw and Mody 1996, Popp 2002, 2006) Analysis: International technology diffusion has important implications for efficient environmental policy (Coe et al 1997, Bayoumi 1999, Rosendahl 2004, Golombek and Hoel 2004, Di Maria and van der Werf 2005). Should developed countries have more stringent environmental targets than developing countries even when it comes to a global common good such as the climate? Will a global common technology pool mitigate carbon leakage or worsen it? EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 13 / 42

14 STEPS IN THIS LECTURE (i) (ii) (iii) What is mechanism underlying carbon leakage in CGEs? (Identify two hypothesis explaining Carbon Leakage, Pollution Haven Channel and Energy Market Channel, and see which of the two explains CGE results) What should one expect that the effect of ETC on Carbon Leakage will be? (Add endogenous technological change with international spillovers to a simple formal model.) Include ETC in CGE and compare EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 14 / 42

15 MODEL SET UP, PREAMBLE We use a partial log-linear model. Assume a CES long-term production function with F.O.C. (σ 1)/σ σ/(σ 1) Y = (Σ ζ i X i ) (1) p i /q = ζ i (X i /Y) 1/σ (2) where Y is output, X i is input i, q is output price, p i is input price, σ is elasticity of substitution, ζ i are technology parameters. Writing this log-linear, the equivalent system is X i = Y σ(q p i ) (3) q = Σ i (α i p i ) (4) where α i is share of input i in value of output EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 15 / 42

16 MODEL SET UP, POLLUTION HAVEN CHANNEL (DI MARIA AND SMULDERS 2004) Two countries: Abating A and non-abating B One world market for energy-intensive intermediates/goods with q relative change in output price ε is elasticity of demand for energy-intensive goods Y A, Y B is relative change in energy-intensive sector output θy A + (1 θ)y B = εq (5) θy A + (1 θ)y B is relative change in world-wide energy-intensive sector output θ: share of country A in world carbon-energy use EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 16 / 42

17 PRODUCTION AND CARBON-ENERGY DEMAND AND SUPPLY Production costs in both countries depend on domestic carbon-energy prices and taxes q = α (p A +τ A ) (6) q = α p B (7) Energy demand E A, E B is proportional to output, decreasing with energy prices and taxes relative to output prices E A = Y A μ(p A +τ A q) (8) E B = Y B μ(p q B ) (9) Energy supply E A = ψp A (10) E B = ψp B (11) α is carbon-energy share in production costs p A is carbon-energy price in abating country, p B in non-abating country τ A is carbon tax in abating country μ is elasticity of substitution between carbon-energy and other production factors ψ is price elasticity of global carbon-energy supply EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 17 / 42

18 COMPLETE MODEL, POLLUTION HAVEN CHANNEL θy A + (1 θ)y B = εq (5) q = α (p A +τ A ) (6) q = α p B (7) E A = Y A μ(p A +τ A q) (8) E B = Y B μ(p q B ) (9) E A = ψp A (10) E B = ψp B (11) Define the carbon leakage rate (outside model) LR = [(1 θ)/θ]e B /E A (12) 7 equations, 7 endogenous variables, E A, E B, Y A, Y B, p A, p B, q. All equations are linear in variables and τ A, thus all variables are proportional in τ A and LR is independent of τ A. LR = ψ(1 θ)/[ψ(1 θ)+αε+μ(1 α)]. (13) EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 18 / 42

19 RESULTS, POLLUTION HAVEN CHANNEL LR = ψ(1 θ)/[ψ(1 θ)+αε+μ(1 α)]. (13) PROPOSITION 1. In the pollution haven hypothesis model The leakage rate is decreasing with the size of the country abating, θ, and zero for θ=1. The leakage rate is increasing in the elasticity of carbon-energy supply, ψ, zero for inelastic carbon-energy supply, ψ=0, and 100% for fully elastic carbon-energy supply, ψ=. The leakage rate is decreasing in the elasticity of demand for energy-intensive goods, ε, and The leakage rate decreasing in the elasticity of substitution between carbonenergy and other inputs, μ. Summarize: LR/ x: θ, ψ+, ε, μ. EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 19 / 42

20 MODEL SET UP, ENERGY MARKETS CHANNEL Major difference: one carbon-energy market, two separated energy-intensive goods markets p is relative change in world carbon-energy price q A, q B is relative change in output price for energy-intensive intermediates Carbon-Energy supply θe A + (1 θ)e B = ψp (14) Energy-intensive goods demand Y A = εq A (15) Y B = εq B (16) EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 20 / 42

21 COMPLETE MODEL, ENERGY MARKET CHANNEL Relative to the Pollution Haven Channel, equations (14), (15), (16) swap domestic and world-markets E A = Y A σ(p+τ A q A ) (17) E B = Y B σ(p q B ) (18) θe A + (1 θ)e B = ψp (14) Y A = εq A (15) Y B = εq B (16) q A = α (p+τ A ) (19) q B = α p (20) LR = 1 ψ/[ψ+(1 θ)(αε+μ(1 α)]. (21) EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 21 / 42

22 RESULTS, ENERGY MARKET CHANNEL LR = 1 ψ/[ψ+(1 θ)(αε+μ(1 α)]. (21) PROPOSITION 2. In the energy market channel model The leakage rate is decreasing with the size of the country abating, θ, and zero for θ=1. The leakage rate is decreasing in the elasticity of carbon-energy supply, ψ, 100% for inelastic carbon-energy supply, ψ=0, and zero for fully elastic carbon-energy supply, ψ=. The leakage rate is increasing in the elasticity of demand for energy-intensive goods, ε, and The leakage rate increasing in the elasticity of substitution between carbon-energy and other inputs, μ. Summarize: LR/ x: θ, ψ, ε+, μ+. EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 22 / 42

23 TESTING THE HYPOTHESES WITH CGE CARBON LEAKAGE RATES (META ANALYSIS) For published CGE carbon-leakages, we only could guess elasticity of supply, ψ, and international competition for energy-intensive intermediates, ν. Test LR/ ψ: + Pollution Haven Channel; Energy Market Channel. Table 1. Carbon leakage(%) dependence in 8 CGE models Global Energy Supply Elasticity (ψ) 8.3** 17.2*** (2.5) (3.1) International Competition (ν) 4.3** (1.1) Competition conditional on elastic supply (ν ψ) 2.6*** (0.5) N (observations from Table 1) 8 8 R 2 adj OLS; significance at p=0.05 marked with **, p=0.01 with ***. Two parameters can explain 74% or 82 % of variation in CGE carbon leakage literature! (Are complex multiple feed backs really important?) EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 23 / 42

24 TESTING THE HYPOTHESES WITH GTAP-E (META ANALYSIS) For GTAP-E (a well-known global trade CGE), we developed our own controlled experiment Take benchmark parameters as suggested by model suppliers Calculate Carbon Leakage if countries that ratified follow Kyoto targets Run N=100 stochastic scenarios where parameters vary uniformly: benchmark x [0.5,1.5] Parameters varied: ψ, fossil fuels elasticity of supply (weighted average for coal/oil/gas) μ, elasticity of supply between carbon-energy and other inputs ε, private consumption elasticity of demand for energy-intensive goods ρ, energy market integration (Armington elasticity of substitution for fossil fuels) ν, energy-intensive goods competition (Armington elasticity of substitution for energy-intensive goods) χ, other international competition (Armington elasticity of substitution for other traded goods) Use OLS to estimate CLR as dependent on parameters EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 24 / 42

25 TESTING THE HYPOTHESES WITH GTAP-E, CTD Table 2. Carbon leakage dependence in stylized models LR/. Pollution Haven Channel Energy Market Channel ψ,elasticity of supply + μ,substitution carbon - other inputs + ε,elasticity of private demand + ρ, energy market integration + ν, energy-intensive goods competition + χ, other international competition? EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 25 / 42

26 OLS ESTIMATION OF GTAP-E RESULTS GTAP-E is consistent with energy market channel, LR/ ψ<0, LR/ μ>0 Dependence on elasticity of supply ψ consistent with CGE meta-analysis Somewhat odd role for trade competition? Table 1. Carbon leakage dependence in GTAP-E ψ,fossil fuel elasticity of supply 10.6 *** 10.7 *** 10.7 *** μ,substitution carbon - other inputs 8.1 *** ε,elasticity of private demand 0.0 ρ, energy market integration 0.5 *** ν, energy-intensive goods competition 0.3 *** 0.2 χ, other international competition 0.1 *** ρ+ν+χ, overall trade competition 1.0 *** N R 2 adj EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 26 / 42

27 STEPS IN LECTURE II (i) (ii) (iii) What is mechanism underlying carbon leakage in CGEs? (Identify two hypothesis explaining Carbon Leakage, Pollution Haven Channel and Energy Market Channel, and see which of the two explains CGE results) What should one expect that the effect of ETC on Carbon Leakage will be? (Add endogenous technological change with international spillovers to a simple formal model.) Include ETC in CGE and compare EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 27 / 42

28 INCLUDE INPUT-SAVING TECHNOLOGY THROUGH LEARNING BY USING This Lecture limits itself to LbD (no R&D) No incentive structure for technological change. That is, technology depends on flows (volumes), not on prices No Scale effects (maintain CRS structure of production) Basic concept of input-saving endogenous technological change through LbD: Consider that μ is the non-technology elasticity of substitution. ETC will make the economy more flexible. It increases the effective elasticity of substitution from μ to σ, μ<σ. Restated: Try to specify two CES production structures, one with constant technology and elasticity of substitution μ, the other with endogenous (variable) technology and elasticity of substitution σ. Part γ of substitution σ is due to technological change, or change embodied in the production capital bought on the international market. The remainder μ=(1 γ)σ is due to intra-sector substitution, and real factor substitution. EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 28 / 42

29 INPUT-SAVING LBD TECHNOLOGY, ISO-OUTPUT CURVES A blue line: long-term elasticity with ETC = σ red and green line: elasticity with fixed technology = μ X2 (energy) B Technology shift: σ μ X 1 (capital & labour) EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 29 / 42

30 INPUT-SAVING LBD TECHNOLOGY, CTD. In CES production function, replace technology parameter ζ i by variable A i, and σ by μ=(1 γ)σ. Y = (Σ [A i X i ] ((1 γ)σ 1)/(1 γ)σ ) (1 γ)σ/((1 γ)σ 1) (22) ((1 γ)σ 1)/(1 γ)σ p i /q = A i (Xi /Y) 1/(1 γ)σ (23) ETC means that A i is endogenous and dependent on output Y and inputs X i, When the two systems must be consistent, then A i = ζ i (1 γ)σ/((1 γ)σ 1) (Xi /Y) γ/((1 γ)σ 1) (24) When we define H i = A i 1 (1 γ)σ, we have a nice simple ETC system μ H i = ζ i (Xi /Y) γ (25) X i = (Y/H i )(p i /q) μ (26) EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 30 / 42

31 Writing this log-linear X i = Y H i + μ(q p i ) (27) H i = γ(y X i ) (28) INPUT-SAVING LBD TECHNOLOGY, CTD. In terms of the partial carbon-leakage model with variables in relative changes, we have E A = Y A H + μ(q A p τ A ) (29) E B = Y B H + μ(q B p) (30) H = γ[θ(y A E A ) + (1 θ)(y B E B )] (31) Notice that μ=(1 γ)σ is that part of substitution not explained by internationally shared technology. Meaning of σ/μ changes when adding ETC! Under this interpretation, adding ETC and reducing σ to μ, domestic Endogenous Input-Saving Technology would not affect system of equations, nor LR. When ETC is simply added to model with μ=σ, its effect is fully equivalent to an increase in σ in model without ETC. EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 31 / 42

32 ENERGY MARKET CHANNEL WITH INPUT-SAVING LBD TECHNOLOGY θe A + (1 θ)e B = ψp (14) Y A = εq A (15) Y B = εq B (16) E A = Y A H + μ(q A p τ A ) (29) E B = Y B H + μ(q B p) (30) q A = α (p+τ A ) (19) q B = α p (20) H = γ[θ(y A E A ) + (1 θ)(y B E B )] (31) The learning rate becomes a bit complex: LR = (a b)/(a b+c)=1 c/(a b+c) (32) where a>0, b>0, and c>0: a = (1 θ)(αε+(1 α)μ)((1 γ)αε+(1 α)μ)) (33) b = (1 θ)(1 α)γμψ (34) c = ψ((1 γ)αε+(1 α)μ)) (35) EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 32 / 42

33 EFFECT OF INPUT-SAVING LBD ON CARBON LEAKAGE PROPOSITION 3. In the energy market channel model with endogenous technological change we have two properties: (i) The carbon leakage is decreasing in the level of global endogenous technology, LR/ γ<0. (ii) For all positive and finite parameters α, ε, μ, ψ, there exists a γ>0 such that the leakage rate is negative, but not always a γ<1. Proof. (i) From (34) we see that b is increasing and proportional in γ. From (33) and (35) we see that a and c are decreasing in γ, but they are proportional to (1 γ). Consequently, the numerator in the last term of equation (32) will be decreasing proportionally with (1 γ), while the denominator will be decreasing faster than proportional with (1 γ). Hence, the ratio will increase, and the leakage rate will fall. (ii) It follows from (32), (33) and (34) that the carbon leakage rate is negative if γ > (αε+(1 α)μ) 2 /[(1 α)μψ], (36) which can be calculated as a finite number. But for ψ small, it can increase without bound. Q.E.D. EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 33 / 42

34 INCLUDE INPUT-SAVING TECHNOLOGY THROUGH R&D Price incentive for technological change. That is, technology depends on value flows, not only on prices No Scale effects (maintain CRS structure of production) Basic concept of input-saving endogenous technological change through R&D: Consider that μ is the non-technology elasticity of substitution. ETC will make the economy more flexible. It increases the effective elasticity of substitution from μ to σ, μ<σ. Restated: Try to specify two CES production structures, one with constant technology and elasticity of substitution μ, the other with endogenous (variable) technology and elasticity of substitution σ. Part γ of substitution σ is due to technological change, or change embodied in the production capital bought on the international market. The remainder μ=(1 γ)σ is due to intra-sector substitution, and real factor substitution. EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 34 / 42

35 ETC THROUGH LBD & R&D, COMPLETE MODEL. R&D is proportional to knowledge H, is proportional to value share of input E: H = γ RD [θ(p A +τ A +E A q A Y A ) + (1 θ)(p B +E B q B Y B )] (37) Notice that this equation follows directly from (29) (30) (31), when summing with weights γθ/μ, γ(1 θ)/μ, and (1 μ)/μ, respectively. PROPOSITION 4. For μ<1, the energy market channel model with endogenous technological change through R&D, the carbon leakage is decreasing in the level of global endogenous technology, LR/ γ RD <0. For elastic elasticity with constant technology, μ>1, carbon leakage is increasing with the level of global endogenous technology, LR/ γ RD >0. EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 35 / 42

36 STEPS IN LECTURE II (i) (ii) (iii) What is mechanism underlying carbon leakage in CGEs? (Identify two hypothesis explaining Carbon Leakage, Pollution Haven Channel and Energy Market Channel, and see which of the two explains CGE results) What should one expect that the effect of ETC on Carbon Leakage will be? (Add endogenous technological change with international spillovers to a simple formal model.) Include ETC in CGE and compare EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 36 / 42

37 GTAP-E SIMULATION SET UP BAU: 2010 benchmark scenario with no climate change policy. S1: 2010 scenario with Annex I + US + Australia meeting Kyoto targets S2: 2010 scenario with Annex I US Australia meeting Kyoto targets S1-γ: as S1, but with technological spill-over, γ [0,0.4]. S2-γ: as S1, but with technological spill-over, γ [0,0.4]. Theory LR/ θ<0: Compare S1&S2 LR/ γ<0: Compare S1 and S1-γ, S2 and S2-γ EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 37 / 42

38 RESULTS OF GTAP-E WITH INPUT-SAVING LBD TECHNOLOGY Carbon leakage decreasing in coalition size + decreasing in technology spillover 20% 15% Leakage rate (%) 10% 5% 0% -5% -10% Gamma Annex I + US + Australia Annex I - US - Australia EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 38 / 42

39 SOME EXTRA ANALYSIS WITH GTAP-E WITH INPUT-SAVING LBD TECHNOLOGY What happens when we take account of technology leading role of OECD countries? S3-γ: as S1-γ, but with technological spill-over only from developed countries to developing countries S4-γ: as S2-γ, but with technological spill-over only from developed countries to developing countries EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 39 / 42

40 SOME EXTRA ANALYSIS WITH GTAP-E WITH INPUT-SAVING LBD TECHNOLOGY Asymmetric technology quickly removes carbon leakage! 20% 15% 10% Leakage rate (%) 5% 0% -5% -10% -15% Gamma Annex I + US + Australia Annex I + US + Australia one-sided spillovers EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 40 / 42

41 LECTURE II. SUMMARY Topic Effect of ETC on carbon leakage: carbon leakage may be substantially smaller in a world with a common technology base. This is good news for proponents of climate policy. Methods: preventing the black box Thanks to meta-analysis, we understand the CGE literature on carbon leakage and GTAP-E controlled experiment as consistent with a 7-equations energy market channel model GTAP-E analysis with ETC is consistent with partial model. Tools Constructive suggestion for adding ETC to CGEs, both passive /LbD/based on volumes, and active /R&D/based on values. EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 41 / 42

42 THANK YOU Reyer Gerlagh EAERE Summer School, Venice Gerlagh, July 1 st, 2006, Lecture II, 42 / 42