Energy Policy and Carbon Emission in Russia: A Short Run CGE Analysis

Transcription

1 Energy Policy nd Crbon Emission in Russi: A Short Run CGE Anlysis Anton Orlov, Hrld Grethe, Scott McDonld Abstrct In this study we investigte the economic effects of crbon txes on the Russin economy. The min findings of this study re the following: n introduction of crbon txes compensted by n increse in lump-sum subsidies my wek the Russin economy through higher energy costs. Moreover, such n environmentl tx reform could induce Dutch disese in Russi becuse of increses in the domestic production of crude oil. Exports of crude oil, petroleum products, nturl gs, nd minerls increses, thereby incresing revenues from export txes, wheres revenues from ll other txes decrese. In contrst, n introduction of crbon txes compensted by reduction of txes on lbour results in n increse in domestic production of most non-energy producing sectors, which implies increses in rel GDP nd household expenditures. The shift in the economic structure towrds non-energy producing sectors is more pronounced under crbon txtion which is compensted by reduction in lbour txes. Moreover, such n environmentl tx reform cn induce double dividend. However, the results strongly depend on the lbour supply elsticity s well s elsticities of substitution between lbour nd the cpitl-energy ggregte. For instnce, higher lbour supply elsticity implies lower increse in lbour costs. Moreover, higher elsticities of substitution between lbour nd the cpitl-energy ggregte encourge shift of the tx burden from lbour to cpitl. Finlly, crbon txtion in Russi my induce strong crbon lekge in other countries due, in prticulr, to strong increse in the export supply of nturl gs nd petroleum products. JEL clssifiction code: Q40, Q50, C68 Key words: energy efficiency, double dividend, crbon txes, Russi Anton Orlov, Deprtment of Agriculture nd Food Policy (420), University of Hohenheim, Schloß, Osthof-Süd Stuttgrt. Emil: orlov@uni-hohenheim.de Tel: Fx: Hrld Grethe, Deprtment of Agriculture nd Food Policy (420), University of Hohenheim, Schloß, Osthof-Süd Stuttgrt. Emil: grethe@uni-hohenheim.de Tel: Fx: Scott McDonld, Deprtment of Economics, Oxford Brookes University, Whetley Cmpus. Oxford, OX33 1HX, UK. Emil: smcdonld@brookes.c.uk Tel:

2 Contents 1 Introduction Double Dividend Hypothesis Model Frmework Dtbse Experiments nd Model Closures Crbon Txtion on Households nd Industries Mcroeconomic nd Aggregted Effects Energy Consumption nd Energy Intensity Sectorl Effects Technologicl Chnge in the Electricity Sector Sensitivity Anlysis Crbon Txtion under Different Emission Reduction Trgets Crbon Txtion under the Assumption of Cpitl Immobility Crbon Txtion under Different Lbour Supply Elsticities Crbon Txtion under Different Functionl Forms of the Vlue-Added Aggregte Crbon Txtion under Different Functionl Forms of the Cpitl-Energy Aggregte Crbon Txtion under Different Nesting Structures of the Energy Aggregte Summry of Results Conclusions References Annex Annex A1: Forml Description of the Model Frmework Annex A1.1: Production System for Non-Energy Producing Sectors Annex A1.2: Production System for Energy Producing Sectors Annex A1.3: Alterntive Nesting Structures for Non-Energy Producing Sectors Annex A1.4: Modelling the Power Genertion Sector Annex A1.5: Structure of Household Demnd Annex A1.6: Corresponding Mcro Functions Annex A2: Elsticities in the Model Annex A3: Chnge in Energy Intensities Annex A4: Chnge in Exports nd Imports Annex A5: Chnge in Activity Prices of Different Aggregtes

3 1 Introduction Russi is not only one of the world s mjor sources of crbon bsed energy col, oil nd gs - but is lso one the most intensive users of energy. Furthermore, Russi ccounts for disproportiontely lrge shre of globl crbon emissions some 5 to 7 percent of globl crbon emission (EIA, 2008); even fter mking llownce for climtic conditions. In lrge prt the high crbon emission rtes re consequence of outdted nd inefficient technologies, legcy of the Soviet er, reinforced by the low cost of energy. The mjor source of these emissions is the power genertion sector (Bshmkov, 2009), which hs the gretest potentil technologicl energy sving, but the residentil building, mnufcturing, nd trnsport sectors lso hve substntil scope for improved energy efficiency. It hs been estimted (World Bnk, 2008) tht Russi could reduce its use of primry energy use by some 45 percent, with consequent economic nd environmentl benefits. However energy using technologies re typiclly embedded in cpitl equipment, e.g., power sttions, smelters, etc., nd buildings, which hve potentilly long productive lives, nd hence the pce of technologicl chnge is inevitbly costly nd long process. There re different brriers, which cn slow down technicl moderniztion. Generlly, two explntions for slow technologicl diffusion cn be distinguished. The first explntion is non-mrket filures, such s the underestimtion of doption costs, high discount rtes, nd heterogeneity of energy users. The second explntion is mrket filures, such s lck of informtion nd low energy prices from non-internlised environmentl externlities or inefficient price regultion. In ddition, there re lso positive externlities from the introduction of less energy intensive technologies such s lerning by doing. Nevertheless, mrket filures provide justifictions for government intervention only (Jffe, 2004). Crudely government intervention could be exercised by legislted restrictions on emissions or by mrket interventions designed to internlise negtive environmentl externlities nd thereby reduce emissions. Crbon txes re one such Pigovin tx. In this context crbon txes would, potentilly, ddress the concerns on severl fronts simultneously. In the short to medium terms they would, inter li, (1) reduce the emission of CO2 nd other emissions such CH 4, N 2 O, SF 6, nd SO 2, which re stemming from the use of energy commodities, induce energy users to (2) optimize the use of existing plnt, (3) substitute lower emission energy source for higher emission sources nd (4) dopt pssive energy sving technologies, e.g., improved insultion. In the longer term the incresed cost of primry energy products 3

4 should both ccelerte the rte of technologicl replcement nd induce technologicl progress (Ruttn, 1997; Newell et l. 1999). Recent evidence (Popp, 2002) indictes tht there is significnt reltionship between energy prices nd new innovtion in energy-sving technologies. In ddition, reduction in crbon emission will provide crbon credits, which cn be sold in the interntionl mrkets. Furthermore, ccording to the environmentl txtion literture, introducing crbon txes compensted by reduction in other distortionry txes my led to double dividend, where the environmentl tx reform cn induce not environmentl welfre gins only, but cn lso reduce efficiency costs of the tx system. The objective of this study is to nlyse the sectorl nd mcroeconomic impct of crbon txes on the Russin economy nd to verify the hypothesis of double dividend. This nlysis is bsed on computble generl equilibrium model n energy/environment dpttion of the STAGE model (McDonld, 2007). To our knowledge this is the first such study for Russi. The rest of the pper is orgnised s follows. The next section gives brief introduction into the concept of double dividend. Section three provides brief description of the model more detils re provided in technicl ppendix. Section four reports on the dtbse used to clibrte the model nd provides some descriptive sttistics bout the bse cse. Section five gives n overview of experiments nd the sensitivity nlyses. The results of the simultions, described in section six, re presented in two sections; section six reports the min results while section seven reports the sensitivity nlyses. A summry of the min results nd the sensitivity nlyses is given in section eight. The finl section provides discussion of the implictions together with comments on how the nlyses cn be further developed. The min findings of this nlysis is tht introducing crbon txes compensted in reduction of lbour txes cn yield double dividend in Russi; however, this strongly depends on the lbour supply elsticity nd elsticities of substitution between lbour nd cpitl-energy ggregte. 2 Double Dividend Hypothesis While crbon txes will increse production costs, the environmentl txtion literture rgues the cse for double dividend. The reltively uncontroversil wek double dividend hypothesis rgues tht, using revenues from environmentl txes to reduce other distortionry txes, one cn chieve cost svings (reductions in welfre costs of txtion) compred to the cse where revenues re returned to households in lump-sum form. On the other hnd, the more mbiguous strong double dividend hypothesis rgues tht not only cn welfre from 4

5 n environmentl improvement be incresed but tht they cn further enhnce ntionl welfre gins by lleviting pre-existing distortions (Goulder, 1994). From theoreticl point-of-view, the double dividend my be fesible in the presence of preexisting distortionry txes if environmentl txes induce strong tx-shifting effect which overweighs the tx-burden effect. In prticulr, there re three min types of tx-shifting effects tht my led to double dividend: tx-shifting mong fctors, tx-shifting cross countries, nd tx-shifting mong household incomes (Mooij, 1996). Therefore, shift of the tx burden from n over-txed fctor to n under-txed fctor cn induce environmentl nd economicl improvements (Bovenberg nd Goulder, 1996). However, the effects of n environmentl tx reform my crucilly depend on fctor mobility. Mooij nd Bovenberg (1996) nd Bovenberg nd Ploeg (1998) write tht shift of the tx burden from mobile lbour towrds immobile cpitl my led to double dividend; however, in the long-run, cpitl is rther mobile. Therefore, the environmentl tx reform could excerbte rther thn llevite initil inefficiencies in the tx system. Aprt from cpitl, nturl resources cn lso be considerted fixed fctor. For instnce, Bento nd Jcobsen (2007) show tht in the presence of fixed fctor (nturl resources) nd Ricrdin rents, n environmentl tx reform my induce double dividend since environmentl txes would prtilly fll on nturl resources. Furthermore, Crrro nd Soubeyrn (1996) s empiricl model emphsises tht under second-best setting, n occurrence of n employment double dividend my be possible, yet they find tht welfre gins of n environmentl tx reform mostly depends on the initil tx system. Moreover, study crried out by Bosquet (2000), which reviewed 139 modelling simultions, shows tht under certin conditions n introduction of environmentl txes my chieve both environmentl nd economic improvements, especilly if revenues from environment txes re recycled trough reduction of socil security contributions. Generlly, the occurrence of double-dividend effects is not unmbiguous. The outcome depends bsiclly on the tx nd economic structure, household preferences, fctor mobility, fctor substitutions, nd revenue recycling strtegies. Hence generl equilibrium nlysis is n pproprite nlyticl method (Goulder, 2002). 3 Model Frmework The model is bsed on simple comprtive sttic model, STAGE (McDonld, 2007). The STAGE model is member of fmily of computble-generl equilibrium (CGE) models, which is bsed on the model developed by de Melo nd Robinson (1989) nd Devrjn et l. (1990). The model is Socil Accounting Mtrix (SAM) bsed single-country CGE 5

6 model, which is implemented in Generl Algebric Modeling System (GAMS) softwre. For this nlysis, we modify the stndrd STAGE model by: 1. Incorporting fctor-fuel 1 s well s inter-fuel 2 substitutions for non-energy producing sectors; 2. Incorporting nested liner expenditure system for households, which distinguishes between energy nd non-energy composites; 3. Disggregting the electricity sector into four technologies: col-fired, gs-fired, nucler, nd hydro, using technology bundle pproch. The forml description of the model is introduced in Annex 1. The eqution block for nesting structures is built using the dul pproch, which implies determintion of unit cost functions (or price indices) nd demnd functions which re derived by pplying Shephrd s lemm. Moreover, the eqution block for the production system s well s household demnd is modelled using mcro functions in GAMS, whose use is quite convenient for chnging functionl forms (e.g. stndrd CES, Cobb-Dougls, Leontief). All mcro functions re locted in the right hnd side in equtions, noted in smll cses. The mcro functions re listed in Annex A Dtbse This nlysis is bsed on Version 7 of the Globl Trde Anlysis Project (GTAP) dtbse, which represents the globl economy in The GTAP dtbse describes bilterl trde, production, nd consumption of 57 commodities nd 113 regions (GTAP, 2007). The GTAP dtbse does not, however, include ny enterprise ccounts, nd one privte household only is represented in the dtbse. For our nlysis we extrct Socil Accounting Mtrix (SAM) for Russi using the GAMS version of the SAM extrction progrm developed by McDonld nd Thierfelder (2004). For this nlysis, we ggregte 57 ctivities into 25 ctivities, where the SAM for Russi represents single product ctivities. Another importnt issue is CO2 coefficients, which differ mong energy commodities due to differences in emission contents. The CO2 coefficients re clculted bsed on the Energy Informtion Administrtion (EIA) dtbse (2011), by dividing the totl CO2 emission of certin energy product (mesured in million metric tons) by the totl mount of energy used 1 A fctor-fuel substitution is substitution between energy inputs nd primry fctor (Burniux nd Truong, 2002) 2 An inter-fuel substitution is substitution mong energy inputs (Burniux nd Truong, 2002) 6

7 (mesured in qudrillion Btu). Col nd petroleum products contin the lrgest emission contents. For exmple, the CO2 coefficient for col is million metric tons per qudrillion Btu, for petroleum products nd crude oil (66.63), for nturl gs, nd gs mnufcture (53.82). Moreover, following the GTAP emission dtbse (Lee, 2008), CO2 coefficients of col, crude oil, nd petroleum products used by the petroleum sector equl zero since they re not flred, but insted re refined. The sme ssumption is mde for nturl gs used by gs mnufcturing. According to the GTAP initil dtbse, there is uniform tx on primry fctors which mounts to 2.6%. This mens tht ll industries py tx of 2.6% on the use of lbour, cpitl, lnd, nd nturl resources. Txes on lbour use represent socil security contributions; however, ccording to the Russin Tx Code, tx rtes of socil security contributions re lrger, 26% in 2009 (nd 34% in 2011) (Federl Lw from 24. Jul.2009 No. 213-FZ). Therefore, we modify the dtbse to ccommodte these higher tx rtes on skilled nd unskilled lbour, using progrm coded in GAMS which is similr with ALTERTAX (Mlcolm, 1998). 5 Experiments nd Model Closures Experiments In this nlysis we simulte n introduction of crbon txes on energy commodities such s col, nturl gs, petroleum products, nd gs mnufcture used by households nd industries. Crbon txtion is not pplicble for crude oil since crude oil is consumed minly by the petroleum sector. For instnce, the shre of crude oil consumption by the petroleum sector is 98% of domestic consumption (GTAP, 2007). The mgnitude of crbon txtion ims t trgeted reduction of crbon emissions by 10% through proportionl increse in tx rtes on crbon emissions. This mens tht crbon txes differ between energy commodities ccording to the CO2 coefficients, yet re the sme mong sectors nd households. We consider two experiments: 1. An introduction of crbon txes compensted by n increse in lump-sum subsidies to privte households (CT_HS); 2. An introduction of crbon txes compensted by reduction of txes on skilled nd unskilled lbour used by industries (CT_LT). 7

8 Furthermore, experiments re ccompnied by sensitivity nlysis to verify the stbility of the results nd to recognize the importnt determinnts: Different emission reduction trgets; Cpitl immobility vs. cpitl mobility; Different lbour supply elsticities; Different functionl forms of the vlue-dded ggregte; Different nesting structures of the energy ggregte; Different functionl forms of the cpitl-energy ggregte. Mcroeconomic Closure nd Mrket Clering In the model we ssume the following closure rules: - Foreign Exchnge Closure: the externl trde blnce is fixed nd the exchnge rte is flexible so tht chnges in the exchnge rte cler the foreign exchnge mrket. This is becuse Russi hs flexible exchnge rte regime; - Investment-Svings Closure: volumes of investment re fixed nd household svings rtes re vrible so tht the cpitl ccounts re clered by chnges in the household svings rte. The ssumption of fixed investment is consistent with the long-run experiment; - Government Account Closure: government svings rtes nd government consumptions re fixed so tht the government ccount is clered either by n increse in lump-sum subsidies or by reduction of lbour txes; - Numerire: the consumer price index (CPI) is set s numerire; - Fctor Mrket Closure: cpitl is ssumed to be perfectly mobile mong sectors; however, we ssume immobility of nturl resources. Lnd is used by the griculturl sector only, nd hence it is de fcto immobile resource. Furthermore, we ssume perfectly elstic supply of lnd. This is becuse Russi hs lrge potentil for lnd resources lot of useful lnd remins fllow. Therefore, it is expected tht the supply of lnd should be quite elstic. The supply of skilled nd unskilled lbour is ssumed to be inelstic. Therefore, we incorporte supply function for skilled nd unskilled lbour: FS shfs * ( WF * (1 TYF )) f f f f efs f where FS f is the supply of skilled nd unskilled lbour, shfs f is the shift prmeter for the supply function, WF f is the wge level, efs f is the lbour supply elsticity which is ssumed to 8

9 equl to 0.30, following Böhringer et l. (2001). Most studies find tht lbour supply is rther inelstic 3. 6 Crbon Txtion on Households nd Industries 6.1 Mcroeconomic nd Aggregted Effects Crbon Txtion Compensted by n Increse in Lump-Sum Subsidies Tble 6.1 shows mcroeconomic nd ggregted effects of crbon txes imposed on energy commodities used by households nd industries. An introduction of crbon txes compensted by n increse in lump-sum subsidies (CT_HS) results in higher energy costs. This mkes the overll economy less competitive compred to the world economy. Consequently, domestic production in most sectors decreses, resulting in decline of the rel GDP by 0.3%. Moreover, CT_HS results in loss of welfre, which is indicted by negtive equivlent vrition 4, 3072 millions USD. Tble 6.1 Mcroeconomic nd ggregted effects of crbon txes (%) CT_HS CT_LT GDP Equivlent vrition, millions USD Exchnge rte Vlue of totl imports Vlue of totl exports Household expenditure Sving rte Lump-sum subsidy fixed Lbour txes fixed Household income Fctor income Cpitl Nturl resources Lnd Skilled lbour Unskilled lbour Fctor prices - Cpitl Nturl resources Lnd fixed fixed - Skilled lbour Unskilled lbour According to vrious studies, the men lbour supply elsticity for men equls 0.07, wheres for women it is 0.43 (Evers et l. 2008). 4 Equivlent vrition mesures how much consumer would py before price increse to void the price increse so tht the income chnge is equivlent the price chnge regrding the utility chnge (Vrin, 1999). 9

10 Fctor supply - Lnd Skilled lbour Unskilled lbour Government income Tx revenues - Import triffs Export triffs Sle txes Fctor use txes Fctor income txes Crbon txes, million USD Subsidy expenditures - Production subsidy Lump-sum subsidy Source: model simultion results A CT_HS leds to reduction in totl exports nd imports of commodities due to lower consumption nd production level. This is shown in the decrese in the vlue of totl imports by 1.5%, wheres the vlue of totl exports decreses by 1.02% (Tble 6.1). A reduction in totl imports nd exports cn led to deprecition s well s n pprecition of the currency. This depends on two fctors: the chnge in totl exports compred to the chnge in totl imports, nd the ggregted elsticity of export supply compred to the ggregted elsticity of import demnd. For exmple, if the ggregted elsticity of imports demnd nd the ggregted elsticity of export supply re equl, then CT_HL would led to n pprecition of the currency (Fig.6.1). This is becuse the vlue of totl imports demnd decreses stronger compred to the vlue of totl exports demnd, which implies stronger shift of imports demnd curve compred to the exports supply curve. Fig. 6.1 Trde blnce. Exchnge rte Exports supply Exchnge rte Imports demnd ER=1 Imports demnd ER=1 Exports supply Source: own compiltion Volume b Volume 10

11 According to the results, CT_HL leds to n increse of exchnge rte by 0.4%, which implies deprecition of the currency, even though the reduction in totl demnd for imports is stronger thn the reduction in totl exports supply. This is becuse the import demnd curve is more elstic compred to the export supply curve (Fig. 6.1b). Therefore, the deprecition of the currency results from reduction in totl exports nd n elstic export supply curve compred to the import demnd curve. Moreover, the reduction in totl exports is minly driven by strong decline in exports of metls nd chemicls: their vlue shre mounts to 25% in the vlue of totl exports. Household income, which consists of fctor income nd lump-sum subsidies, increses by 0.03% becuse of higher lump-sum subsidies, wheres the totl fctor income decreses by 3.3% (Tble 6.1). For exmple, income from nturl resources decreses by 3.8% nd income from cpitl decreses by 4.4%. The strong decline in income from nturl resources results from decline in domestic production of col, nturl gs, minerls, nd griculture. Moreover, the supply of lnd nd lbour decreses. Lump-sum subsidies increse by 17.8%, where the increse in revenues from crbon txes is by 20% more thn the increse in expenditures for lump-sum subsidies in vlue terms. Despite the increse in household income, household expenditure decreses by 0.2% becuse of higher svings rte. According to the model closures, government svings, government consumption, nd the volume of investment is fixed, which implies n investment driven closure. The vlue of investment, however, decreses becuse of decresing prices of investment commodities such s construction. A decline in cpitl income nd deprecition of the currency leds to strong decline in the totl svings 5. As result, the svings rte by households increses by 0.4% to cler the sving investment ccount. Alterntively, sving driven closure (fixed svings rte) would result in n increse in household expenditure; however, this would significntly reduce investments. As result of lower production nd consumption levels, revenues from lmost ll txes decrese. For exmple, crbon txtion results in strong reduction in revenues from sle txes, by 4.2%. This is becuse revenues from sle txes consist minly of txes on petroleum products nd the domestic consumption of petroleum products decreses becuse of higher petroleum prices. On the other hnd, revenues from export txes nd crbon txes increse. Revenues from export txes increse by 3.8% becuse export of crude oil nd petroleum 5 According to the model, totl svings consist of fiscl deprecition, household svings, government svings, nd foreign svings (borrowings) multiplies by the exchnge rte. According to the dtbse, Russi is net borrowing of cpitl. 11

12 products increse nd export txes consists minly of txes on crude oil, metls, petroleum products, etc. Crbon Txtion Compensted by Reduction of Lbour Txes Under crbon txtion compensted by reduction of lbour txes (CT_LT), the economy is less dversely ffected by higher energy prices. As result, the rel GDP increses slightly by 0.5%, wheres under CT_HS it decreses by 0.3%. Moreover, CT_LT results in welfre gin, which is indicted by positive equivlent vrition, 2575 millions USD. The exchnge rte increses by 0.5%, which implies stronger deprecition of the currency compred to the deprecition of the currency under CT_HS. This is becuse the reduction in totl imports is less pronounced under CT_LT thn under CT_HS. The resons for the currency deprecition re explined bove (Fig. 6.1b). Household income increses proportionlly to the increse in fctor income, by 1.2%, wheres lump-sum subsidies re fixed. The increse in fctor income results from higher income from lnd vi n increse in griculture production s well s from incresed skilled nd unskilled lbour vi lower lbour txes. In contrst, income from nturl resources nd cpitl decreses by 3.6% nd 3.7%, respectively. The reduction in income from nturl resources results from decline in production of resource-bsed sectors such s col, nturl gs, nd minerls. The reduction in cpitl income results from decline in production of cpitl-intensive sectors such s the trde sector. Moreover, under CT_LT the increse in household expenditures, by 1.8%, is stronger thn the increse in household income becuse of lower svings rte. This is demonstrted with the decrese in the svings rte by 0.9%. According to the model closures, government svings, government consumption, nd the volume of investment is fixed, which implies n investment driven closure. The vlue of investment, however, decreses becuse of decresing prices of investment commodities such s construction. As consequence, the totl svings decrese proportionl to the decline in the vlue of investment. On one hnd, CT_LT leds to decline in cpitl income nd deprecition of the currency, which results in reduction of totl svings. On the other hnd, higher household income provide more svings for the economy. Since the effect of higher household income is stronger thn the effect of currency deprecition nd lower cpitl income, the svings rte decreses to mtch the decresing demnd for investment. Alterntively, if we fix the svings rte, investment in rel terms would increse from higher household income; however, the increse in domestic demnd would be less pronounced thn it would be under investment driven closure. 12

13 Furthermore, under CT_LT most non-energy producing sectors fce n increse in domestic production nd consumption. Therefore, revenues from import triffs, export triffs, nd fctor income txes increse. Revenues from txes on fctor income increse by 6.9%, nd revenues from txes on exports increse by 4.0%. In contrst, revenues from sle txes nd txes on fctor use decrese. The decline in revenues from sle txes results from reduction in domestic demnd for petroleum products due to higher petroleum prices. 6.2 Energy Consumption nd Energy Intensity Energy Blnce Fig. 6.2 nd 6.2b illustrte bsolute chnges in the energy blnce of Russi, which re mesured in volume terms. For exmple, CT_HS leds to reduction in domestic consumption (QQ) of energy commodities, implying decline in domestic demnd for imported (QM) nd domesticlly produced commodities (QD). The bsolute reduction in demnd for domesticlly produced energy commodities is stronger thn the reduction in demnd for imported commodities. This is becuse domesticlly produced energy commodities dominte in the domestic mrket: for exmple, electricity, crude oil, nd gs mnufcture mrkets re lmost served by domestic producers. On the other hnd, the reltive reduction in demnd for imports is stronger thn the reduction in demnd for domesticlly produced energy commodities becuse of deprecition of the currency. Fig. 6.2 Chnge in energy blnce under CT_HS (bsolute chnge in volume). 10 chnge in volume Col Ntl.gs Gs.mn Source: model simultion results QQ QM QD QE QXC Fig. 6.2b Chnge in energy blnce under CT_HS (bsolute chnge in volume). 13

14 chnge in volume Oil -0.3Petrol Electricity QQ QM QD QE QXC QQ is the domestic demnd for the composite of imported nd domesticlly produced commodities: QQ=QM+QD; QM is the import; QD is the domestic supply of energy commodities for domestic mrkets; QE is the export; nd, QXC is totl domestic production for domestic nd export mrkets: QXC=QD+QE. Source: model simultion results A lower domestic demnd results in reduction in domestic production of ll energy commodities, excluding crude oil. Moreover, lower profitbility in production of col, gs mnufcture, nd electricity leds to n outflow of resources (cpitl, lbour) from these sectors, resulting in decline in exports. In contrst, deprecition of the currency induces shift in production of crude oil, nturl gs, nd petroleum products towrds export mrkets (Fig. 6.2 nd 6.2b). The chnge in the energy blnce under CT_LT is quite similr. Consumption of Energy Commodities by Households As result of higher energy prices, household consumption of energy commodities decreses. Fig. 6.3 illustrtes the chnge in consumption of energy commodities used by households. As result of CT_HS, household consumption decreses by the following mounts: 6.2% for col, 5.0% for gs mnufcture, 2.0% for nturl gs, nd 4.8% for petroleum products. There re no crbon txes on electricity; however, households demnd for electricity decreses by 1.7% becuse of higher electricity prices. Fig. 6.3 Chnge in household consumption of energy commodities (%). 14

15 Col Ntl. gs Petroleum Electricity Gs mn chnge in % CTHS CTLT Source: model simultion results Under CT_LT, the reduction in household demnd for energy commodities is less pronounced. This is becuse households fce n increse in totl fctor income due to higher income from lnd nd lbour. Therefore, the decline in demnd for energy commodities used by households is diminished by higher household expenditures. Furthermore, CT_LT leds to higher increse in crbon txes compred to CT_HS. As result, domestic prices of energy commodities including crbon txes increse stronger under CT_LT. Fig. 6.4 illustrtes the chnge in consumer prices of energy commodities including nd excluding crbon txes under different revenue recycling strtegies. Fig. 6.4 Chnge in consumer prices of energy commodities including nd excluding crbon txes under different revenue recycling strtegies (%). chnge in % Col Oil Ntl.gs Petroleum Electricity Gs mn. P+crb. (CT_HS) P (CT_HS) P+crb. (CT_LT) P (CT_LT) P+crb. (CT_HS) is the consumer price, including the crbon tx, under CT_HS; P (CT_HS) is the consumer price, excluding the crbon tx, under CT_HS; P+crb. (CT_LT) is the consumer price, including the crbon tx, under CT_LT; nd, P (CT_LT) is the consumer price, excluding the crbon tx, under CT_LT. Source: model simultion results 15

16 An introduction of CT_HS leds to n increse by 21.5% in the consumer price of col, 9.2% for nturl gs, 15.6% for petroleum products, 17.6% for gs mnufcture. The consumer price of electricity increses by 8.3% becuse of higher production costs. In contrst, the consumer price of crude oil decreses slightly due to lower production costs. As mentioned bove, crude oil is not subject for crbon txtion. In the bse simultion, the level of subsistence consumption is ssumed to equl 70%. At the sme time, household demnd for energy commodities significntly depends on the level of subsistence consumption (Fig. 6.5). Under higher level of subsistence consumption, the reduction in consumption of the energy composite is less pronounced. For exmple, when the level of subsistence consumption equls 90%, household consumption of col decreses by 2.3%, for gs mnufcture it decreses by 1.8%, for electricity it decreses by 0.7%, nd for petroleum products it decreses by 1.8%. Fig. 6.5 Chnge in consumption of energy commodities by households under different levels of subsistence consumption (%). chnge in % Col Ntl. gs Petroleum Electricity Gs mn Sub.cons.=70% Sub.cons.=80% Sub.cons.=90% Source: model simultion results Moreover, the rtes of crbon txes re higher under lower level of subsistence consumption. This results in higher energy costs for industries. As result, the economy is more dversely ffected by higher crbon txes. The difference between the totl consumption level nd the level of subsistence consumption my prtilly be considerted s proxy for the potentil energy efficiency potentil of households tht could be relized through higher energy prices. The level of subsistence consumption in reltion to current consumption is expected to be reltive high in Russi becuse of low household income. Consumption of Energy Commodities by Industries 16

17 As result of crbon txes, demnd for energy commodities such s col, nturl gs, petroleum products, nd gs mnufcture decreses for ll industries. Fig. 6.6 revels the chnge in the overll demnd for energy inputs used by industries. The most dversely ffected energy sectors re col, petroleum products, nd gs mnufcture becuse of their high CO2 emissions. Most sectors, however, fce n increse in demnd for crude oil through inter-fuel substitutions since crude oil is not txed by crbon txes. Moreover, crbon txtion leds to n increse in demnd for col by sectors such s pper products, trnsport equipment, nd minerls becuse of incresing production. This implies n increse in crbon emissions produced by these sectors. Under CT_HS, the totl demnd for crude oil by ll sectors decreses by 7.3% becuse of decline in domestic production of petroleum products: the petroleum sector is the lrgest domestic consumer of crude oil with shre of 98% in the totl domestic consumption of crude oil (GTAP, 2007). Moreover, the totl demnd for electricity used by sectors decreses by 7.5% becuse of higher electricity prices. The reduction in domestic demnd for energy commodities under CT_LT is quite similr with those under CT_HS (Fig. 6.6). Fig. 6.6 Chnge in consumption of energy commodities used by industries (%). 0-2 Col Oil Ntl.gs Petroleum Electricity Gs mn. -4 chnge in % CT_HS CT_LT Source: model simultion results Crbon txtion on households nd industries llows n voidnce of sectorl crbon lekges. For exmple, under crbon txtion on industries only, the domestic price level for energy commodities used by households would decrese. This would imply n increse in the finl demnd for energy commodities used by households. A similr effect occurs under crbon txtion on households only. Under crbon txtion on households nd industries, the 17

18 decline in domestic production would be less pronounced since households nd industries tke the burden of crbon txtion; however, the extent of this decline significntly depends on the level of subsistence consumption. Energy Intensities The min chnnel of reduction in energy intensities of the whole economy is through decline in domestic production which results from structurl chnge towrds less energyintensive sectors, implying decline in demnd for energy resources. Moreover, energy intensities cn lso decrese through technologicl progress nd substitution possibilities mong primry fctors nd energy inputs. In this nlysis, we consider substitution possibilities mong primry fctors nd energy inputs only. A technologicl progress is not considerted in this study. The chnge in energy intensities differ from sector to sector depending on the initil energy nd fctor intensities of the sector. The energy intensity is clculted by dividing the mount of totl energy consumed by output. Under Leontief nesting structure, the energy intensity would be constnt. For exmple, the energy intensity of the trnsport sector decreses by 7.2%, which mens tht the trnsport sector requires 7.2% less energy resources for producing unit of output. The mximum reduction of energy intensity through substitution in production does not exceed 9% (Annex Tble A3). Crbon Emissions The mgnitude of crbon txtion ims t trgeted reduction of overll crbon emissions by 10%. This reduction of crbon emissions is minly chieved through decline in domestic demnd for energy commodities by sectors such s electricity, trnsports, nd chemicl products. Fig. 6.7 illustrtes the shres of emission reductions by industries nd households. Fig. 6.7 Shres of CO2 emission reductions by sources (%). 18

19 chnge in % Chemicls Electricity Trnsports Households Rest CTHS CTLT Source: model simultion results For exmple, reduction of energy use by the electricity sector ccounts for 42% of the overll reduction of crbon emissions, for the chemicls sector it is 11%, for trnsports it is between 21 nd 22%, nd for ll other sectors it is between 17 nd 18%. In ddition, reduction of energy consumption by households contributes between 17 nd 18% to the overll reduction of crbon emissions. The electricity sector is the lrgest domestic contributor of emissions. According to the Fifth Ntionl Report of Russin Federtion (UNFCCC, 2010) the power genertion sector produces bout 81% of totl GHG emissions in Russi. Moreover, bout 41% of the totl technicl energy sving potentil is concentrted in the Russin power genertion sector (electricity nd het) since the power genertion sector is the lrgest domestic consumer of energy resources (Bshmkov, 2009). Therefore, the power genertion sector is expected to ply the crucil role in Russi s environmentl policy. 6.3 Sectorl Effects Crbon Txtion Compensted by n Increse in Lump-Sum Subsidies Tble 6.3 revels sectorl effects of crbon txes on households nd industries. An introduction of CT_HS leds to reduction in domestic production in most sectors due to higher energy costs nd lower domestic demnd: domestic production of col decreses by 8.3%, for nturl gs it decreses by 2.8%, for petroleum products it decreses by 7.4%, nd for gs mnufcture it decreses by 8.7%. Tble 6.3 Chnge in verge costs nd domestic production (%) CT_HS CT_LT Industries Averge costs Domestic Averge costs Domestic 19

20 production production Agriculture Col Crude oil Nturl gs Minerls Food products Textiles Wood products Pper products Petroleum products Chemicl products Minerl products Metls Metl products Trnsport equipment Electronic equipment Mchinery equipment Electricity Gs mnufcture Wter Construction Trde Trnsports Privte services Government services Source: model simultion results The electricity sector is the lrgest domestic consumer of col, gs, nd gs mnufcture nd is lrge domestic consumer of petroleum products. Therefore, this sector, in prticulr, is strongly ffected by higher energy prices. As result of crbon txes, verge production costs of electricity genertion increse by 8.3%. Consequently, ll electricity-intensive sectors such s wood products, chemicl products, metls, metl products, minerl products, nd wter, re dversely ffected by higher electricity prices since electricity is significnt prt of the totl production costs for these sectors. For exmple, in the wood products sector the shre of electricity costs of totl production costs is 43.7%, for chemicl products it is 18.7%, for metls it is 14.1%, nd for wter it is 13.8% (GTAP, 2007). As result, higher energy costs led to higher verge production costs in these sectors, even though costs for primry fctors decrese. Domestic production of wood products nd chemicl products is reduced by 11.3% nd 11.7%, respectively. In contrst, verge production costs decrese in sectors such s griculture, minerls, construction, trde, nd services. However, lower domestic demnd leds to decline in domestic production of these commodities. 20

21 Furthermore, CT_HS leds to n increse in domestic production of crude oil, pper products, nd trnsport equipment due to lower production costs. In other words, the effect of lower fctor costs overweighs the effect of higher energy costs due to the lower energy intensity in these sectors compred to others. The chnge in verge costs results from chnges in structure in production costs, which is indicted by chnges in ctivity prices (Annex Tble A4). Introducing crbon txes leds to decline in costs for cpitl, where the ctivity price of the energy ggregte increses. The chnge in ctivity prices of cpitlenergy ggregtes depends on the cpitl-energy intensity of sectors. Moreover, ctivity prices of the lbour ggregtes decrese under CT_HS nd CT_LT in ll sectors. Therefore, the chnge in ctivity prices of vlue-dded-energy ggregtes minly depends on lbour intensity. The chnge in ctivity prices of intermedite ggregte is reltive smll nd different from sector to sector. Therefore, lbour intensive sectors hve decline in verge production costs despite n increse in energy costs. Crbon Txtion Compensted by Reduction of Lbour Txes Under CT_LT, we observe stronger increse in domestic production of commodities such s pper products nd trnsport equipment becuse of higher domestic demnd nd lower production costs (Tble 5.3). Moreover, higher household income nd lower lbour costs result in n increse in domestic production of commodities such s griculture, food products, textiles, mchinery equipment, wter, trde, nd services. Therefore, under CT_LT the structurl chnge to non-energy producing sectors is more pronounced compred to under CT_HS. Imports nd Exports A CT_HS leds to lower household expenditures. As result, imports of lmost ll commodities decrese (Tble ). Furthermore, the reduction in imports of energy commodities is stronger compred to non-energy commodities becuse crbon txes re imposed on domestic s well s imported energy commodities. However, Russi is lrge energy producer nd exporter, the mount of imported energy commodities is rther negligible. Tble 6.4 Chnge in exports nd imports (%) CT_HS CT_LT Industries Exports Imports Exports Imports Col For chnges of exports nd imports in other sectors see Annex Tble A3. 21

22 Crude oil Nturl gs Wood products Petroleum products Chemicl products Metls Electronic equipment Electricity Gs mnufcture Trnsports Source: model simultion results In contrst, imports of wood products, chemicl products, nd electricity increse s result of both revenue recycling strtegies. As result of higher production costs, domesticlly produced wood products, chemicl products, nd electricity become less competitive compred to imported commodities. Therefore, the substitution effect domintes the negtive output effect. Nevertheless, totl domestic consumption of wood products, chemicl products nd electricity decreses becuse of strong increse in domestic prices. In comprison, under CT_LT we lso observe more of n increse in imports of metls, electronic equipment, nd trnsports. This is becuse of higher household income which drives domestic demnd for non-energy commodities. Furthermore, crbon txtion under the both revenue recycling strtegies results in strong increse in the export supply of nturl gs. Exports of nturl gs increse by 14.3%, which my imply strong lekge effects in countries tht import Russin nturl gs. In contrst, the export supply of wood products nd chemicl products decreses strongly. Under CT_HS, the export supply of wood nd chemicl production is reduced by 19.9% nd 16.3%, respectively. In ddition, under CT_LT the increse in the export supply of some sectors is more pronounced thn under CT_HS becuse of lower increse in production costs nd stronger deprecition of the currency. 6.4 Technologicl Chnge in the Electricity Sector As mentioned bove, the electricity sector is one of the most dversely ffected sectors by the introduction of crbon txtion. This is becuse the electricity sector is the lrgest domestic consumer of nturl gs, col, nd gs mnufcture nd lso lrge domestic consumer of petroleum products. A CT_HS results in decline in domestic production of electricity by 5.6% (Tble 6.5). Moreover, technologies such s nucler nd hydro become more profitble compred to therml technologies. For exmple, output from nucler nd hydro technologies 22

23 increses by 13.8% ech while output from col-fired technologies decreses by 12.06% nd output from gs-fired technologies decreses by 5.4%. Tble 6.5 Chnge in output of electricity from different electricity genertion technologies (%) Output (elst.=2.00) Output (elst.=1.50) Output (elst.=0.50) CT_HS CT_LT CT_HS CT_LT CT_HS CT_LT Col-fired Gs-fired Hydro Nucler Totl Source: model simultion results Output from col-fired technologies decreses stronger compred to gs-fired technologies. This is becuse crbon txes on col re higher thn crbon txes on gs becuse of higher CO2 coefficients. Col-fired technologies, however, re ssumed to be more cpitl-intensive compred to gs-fired technologies (Fig. 6.8). Fig. 6.8 Cost structure by electricity technologies (% of totl costs) % Col-fired Gs-fired Hydro Nucler Energy inputs Cpitl Skilled nd Unskilled Lbour Intermedites Source: own clcultion bsed on the version 7 of the GTAP dtbse; EIA (2011); APEC (2006); Veselov et l. (2010) At the sme time, crbon txtion leds to reduction in cpitl costs, yet the effect of higher energy costs overweighs tht of lower cpitl costs. Therefore, verge production costs for col-fired technologies increse more compred to tht of gs-fired technologies (Tble 6.5). Furthermore, lower elsticities of substitution mong technologies diminishes the extension of nucler nd hydro technologies in fvour of therml technologies such s col- nd gs-fired technologies. Under n elsticity of substitution equls to 1.5, the decrese in output from 23

24 col- nd gs-fired technologies is less pronounced, while the increse of hydro nd nucler technologies is lso lower. Under n elsticity of substitution equls to 0.5, ll technologies operte like complements: n introduction of crbon txes results in decline in output for ll technologies with the decrese from col-nd gs-fired technologies being more pronounced becuse of higher energy costs (Tble 5.5). 7 Sensitivity Anlysis 7.1 Crbon Txtion under Different Emission Reduction Trgets A CT_HS under higher trgets of emission reductions results in stronger decline in domestic production in most sectors. This is becuse higher crbon txes imply higher energy costs. Therefore, the economy is more dversely ffected by higher energy prices. In contrst, under higher trgets of emission reductions we observe lrger increse in domestic production of crude oil, pper products, nd trnsport equipment becuse of lower costs for primry fctors. Generlly, under higher trgets of emission reductions, the mcroeconomic nd sectorl effects of crbon txes re more pronounced. Furthermore, under higher trgets of emission reductions, CT_LT results in lrger decline in domestic production of most energy-intensive sectors. However, we lso observe stronger increse in domestic production of commodities such s griculture, crude oil, food, textiles, crude oil, pper products, nd trnsport equipment. Moreover, under reduction of crbon emissions by 20%, we observe decline in domestic production of sectors such s wter nd trde due to lower level of overll production nd consumption. A reduction of crbon emission by 30% would result in decline of the rel GDP by 0.07%, thereby implying decline in domestic production of most sectors. 7.2 Crbon Txtion under the Assumption of Cpitl Immobility Under the ssumption of cpitl mobility, CT_HS results in n increse in domestic production of crude oil, pper products, nd trnsport equipment due to lower production costs. Cpitl mobility is consistent with the ssumption of long-run experiments. However, under the ssumption of sectorl immobility of cpitl, domestic production of pper products nd trnsport equipment decreses due to lower domestic demnd. Therefore, there is only n increse in domestic production of crude oil, wheres the domestic production of ll other commodities decreses. Generlly, under cpitl immobility the economy is more dversely ffected by crbon txes due to smller djustbility in production. Therefore, declines in domestic production of most sectors become more pronounced. 24

25 Under the ssumption of cpitl immobility, CT_LT hs similr impcts s under the ssumption of cpitl mobility. However, the increse in domestic production of sectors such s griculture, food products, textiles, pper products, mchinery equipment, wter, nd trde is less pronounced due to rigidity in the cpitl mrket. In ddition, under cpitl immobility, crbon txes led to n increse in the export supply of petroleum products by pproximtely 30% under both revenue recycling strtegies, wheres under cpitl mobility it increses between 3.4 nd 3.8%, respectively. Moreover, cpitl immobility implies less elstic demnd for energy inputs used by industries. As result, the increse in crbon tx rtes is more pronounced, implying more revenues from crbon txes. Finlly, crbon txtion under cpitl immobility leds to n pprecition of the currency, wheres under cpitl mobility the currency deprecites. Currency pprecition is minly the result of reltively strong increse in the export supply of petroleum products nd nturl gs, where the totl export curve becomes less elstic becuse of rigidity in the cpitl mrket (Fig. 5.1). 7.3 Crbon Txtion under Different Lbour Supply Elsticities The lbour supply elsticity hs significnt impct on the effects of crbon txtion. A higher lbour supply elsticity results in less of n increse in net wges. As result, the decline in lbour costs is more pronounced compred to when lower lbour supply elsticity is ssumed. As shown in Fig. 7.1, under lbour supply elsticity equls to 0.1, CT_LT leds to n increse in the rel GDP by 0.05% nd household expenditures increse by 0.6%. Equivlent vrition mounts to (-568) millions USD, implying welfre loss. On the other hnd, under lbour supply elsticity equls to 1.00, the rel GDP increses by 1.9% nd household expenditures by 5.1%. Equivlent vrition mounts million USD, which indictes welfre gin. As result of higher household income nd lower lbour costs, the increse in domestic production of most non-energy producing commodities is lrger under higher lbour supply elsticity compred to under lower lbour supply elsticity. Fig. 7.1 Chnge of the rel GDP nd household expenditures under different lbour supply elsticities (%). 25