GLOBAL CLIMATE CHANGE MITIGATION: STRATEGIC INTERACTIONS OR UNILATERAL GAINS?

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1 40 TH IAEE INTERNATIONAL CONFERENCE SINGAPORE, JUNE 2017 GLOBAL CLIMATE CHANGE MITIGATION: STRATEGIC INTERACTIONS OR UNILATERAL GAINS? SIGIT PERDANA Business School, University of Western Australia **This presentation is based on joint paper with Professor Rod Tyers from Business School of University of Western Australia and Research School of Economics, The Australian National University

2 2

3 I. OVERVIEW/ BACKGROUND Global warming gridlock: Scale Mitigation Cost; Voluntary Base Commitment; Free Riding; Carbon Leakage; 3

4 I. OVERVIEW/ BACKGROUND Uniform Carbon Taxation Regime has been proposed as an alternate to Kyoto Protocol ( Cooper, 1998, 2001, 2007 ; Nordhaus, 2007, 2013); Claims: easier to formulate; enforcing broad participation; same benefit as quantity based approach; reduce leakage; dynamically efficient. Critics: big but shallow; coordination game. 4

5 I. OVERVIEW/ BACKGROUND This research offers evaluations of : macro effects of carbon taxation; the climate benefits; strategic interactions; policy consideration. 5

6 II. ESTIMATING FUTURE ECONOMIC COST OF MITIGATION Modelling Approach GDYN-Energy Model (Golub et al, 2013); Combined GTAP-E Model (Burniaux & Truong 2012) GTAP Dynamic Model Global (Ianchovina & Wamsley 2012); Neoclassical structure : perfect competition, Armington product differentiation, non-homothetic consumer demand, international trade and endogenous international financial flows; Intermediary agent of global trust to minimize portfolio complexity. 6

7 II. ESTIMATING FUTURE ECONOMIC COST OF MITIGATION Production Structure Output (CES Function) σ = 0 Value-Added Energy σvae Other Input (energy as feedstock) Land Labour Natural Resources Capital-Energy Composite σd Foreign σlab Domestic σke σm Skilled Unskilled Region 1 Region i Capital Energy Composite Non Electric σener Electric σnely σd Coal Non Coal Domestic Foreign σd σncoal σm Region 1 Region i Domestic Foreign Oil Gas Oil Products σd σm Region 1 Region i Domestic Foreign σm Region 1 Region i 7

8 II. ESTIMATING FUTURE ECONOMIC COST OF MITIGATION Household Consumption (CDE Function) Government Consumption (CES Function) Household Demands for Private Goods CDE Govt. Demand for Composite σgenne=0.5 Energy Composite Non Energy Composite CES Energy Composite σpen =1 Non Energy Commodities σgen =1 σgne=1 Oil Products Oil Gas Coal σd Electricity Domestic σd Foreign electricity Oil & Pcts Gas Coal σd.. σm Domestic Foreign Domestic Foreign σm Region 1 Region i Region 1 Region i Region 1 σm Region i 8

9 II. ESTIMATING FUTURE ECONOMIC COST OF MITIGATION Database and Baseline Construction Global Dataset of GTAP 7: 113 regions and 57 sectors condensed to 21 regions and 12 sectors, base year 2004; Calibrated regional investment risk premium; Exogenous population and labour supply projections (CEPII 2010 and Foure et all 2013); Carbon emission coefficients from Lee (2008); 9

10 II. ESTIMATING FUTURE ECONOMIC COST OF MITIGATION Regional Carbon Emission 2004 USA EUROPE CHINA %% of Global > < 3 Source: GTAP 7 Database 10

11 II. ESTIMATING FUTURE ECONOMIC COST OF MITIGATION Baseline Projection of Regional GDP Growth Rates 11

12 II. ESTIMATING FUTURE ECONOMIC COST OF MITIGATION Projected Regional Carbon Emission 2050 CHINA INDIA %% of Global > < 2 Source: Research Estimation 12

13 Percent Growth II. ESTIMATING FUTURE ECONOMIC COST OF MITIGATION Projected Real GDP Growth Deviation 20 USD Uniform Tax Indonesia Oth.ASEAN Australia China -3 Japan USA EU28 ROW Forecast Year 13

14 III. CALCULATING BENEFIT OF MITIGATION Shared benefit from lower global carbon load (as % of GDP) Carbon Emission (GT) Atmospheric Concentration (ppm) Global Temperature Rising ( 0 C) Global Welfare Loss (% GDP) 14

15 III. CALCULATING BENEFIT OF MITIGATION Mitigation scenarios give projected total carbon emissions in 2050 Baseline (No country) : GT; All countries 64 GT; Match total emissions with IPCC Global Temperature Scenario Emission (GT) in 2050/ Lower Border IPCC (GHG scenario) Atmospheric Concentration (PPM) Best Temperature Estimate ( 0 C) Likely Uncertainty Range ( 0 C) 90 A1F A A1B A1T Note: The IPCC scenarios use year 2005 as baseline, then projected until year Comparative table above show its projection in 2050 Atmospheric Concentration of GHG in 2005 is 379 ppm 15

16 Temperature Change Degree Celcius III. CALCULATING BENEFIT OF MITIGATION Emission and Global Temperature Change from year y = x x Low Estimate Best Estimate High Estimate y = x x y = x x Emission GT 16

17 III. CALCULATING BENEFIT OF MITIGATION Welfare Impact (% GDP) 17 Studies of Temperature Rising & Global GDP Loss y = x x R² = X = temperature ( o C); Y = Global Welfare Impact (% GDP) Temperature Rise 17

18 III. CALCULATING BENEFIT OF MITIGATION Global Welfare Impact (% GDP) Emission and Global Welfare Reduction y = x x X = Emission Released (GT); Y = Global Welfare Change (% GDP) y = x x Low Estimate Best Estimate High Estimate y = x x Emission (GT) 18

19 IV. STRATEGIC GAME ANALYSIS: STATIC GAMES Normal form games: move simultaneously; Construct payoff : netting cost from shared benefit in present value term, in each temperature scenario; Using 10 year Treasury Bond yield rate of ; Strategic options will depend on the accumulated net welfare (2004 USD); 3 Players (China, US, EU); 5 Players (China, US, EU, Indonesia, Australia). 19

20 IV. STRATEGIC GAME ANALYSIS: STATIC GAMES 3 PLAYERS LOW Scenario (in Trillion USD) EU EU Participate Defect China China Participate Defect Participate Defect USA Participate Participate USA Defect Defect DSNE: ALL DEFECT (NO PRISONERS DILEMMA) 20

21 IV. STRATEGIC GAME ANALYSIS: STATIC GAMES 3 PLAYERS BEST Scenario (in Trillion USD) EU EU Participate Defect China China Participate Defect Participate Defect USA Participate Participate USA Defect Defect Nash Equilibrium: USA Participate; Others: Defect 21

22 IV. STRATEGIC GAME ANALYSIS: STATIC GAMES 3 PLAYERS HIGH Scenario (in Trillion USD) EU EU Participate Defect China China Participate Defect Participate Defect USA Participate Participate USA Defect Defect DSNE: ALL Participate 22

23 IV. STRATEGIC GAME ANALYSIS: STATIC GAMES 5 PLAYERS LOW SCENARIO (TRILLION USD) NO COUNTRY PARTICIPATION PARTICIPATE DEFECT 1 US China EU Indonesia Australia DSNE: ALL DEFECT 23

24 IV. STRATEGIC GAME ANALYSIS: STATIC GAMES 5 PLAYERS BEST SCENARIO (TRILLION USD) NO COUNTRY PARTICIPATION PARTICIPATE DEFECT 1 US China EU Indonesia Australia Nash Equilibrium: USA Participate. Others : Defect (Free Riding) 24

25 IV. STRATEGIC GAME ANALYSIS: STATIC GAMES 5 PLAYERS HIGH SCENARIO (TRILLION USD) NO COUNTRY PARTICIPATION PARTICIPATE DEFECT 1 US China EU Indonesia Australia DSNE: Indonesia & Australia Free Riding 25

26 V. STRATEGIC GAME ANALYSIS: SIDE PAYMENT Billion USD (2004) Unilaterally Benefit by Carbon Tax Compare to Non Abatement Case (50) (100) (150) China USA EU28 (200) Forecast Years 26

27 Trillion USD (2004) V. STRATEGIC GAME ANALYSIS: SIDE PAYMENT Affordability of Side Payment Total Benefit from Global Implementation of Carbon Tax, gained by China, USA & EU Total Loss carried by other countries, moving from free riding to voluntarily joining Forecast Years 27

28 VI. CONCLUSION USA is a net gainer in net present value terms from unilateral implementation; The comparative net benefits to Europe and China are negative but small, making their choice sensitive to the discount rate and temperature scenario; The dominant strategy for all other countries is to free ride; Taking the three large economies as a group, there are net gains from abatement that would be bolstered by universal adoption; Yet compensatory side payments are still not affordable. The net gains to all regions do not begin to appear for two decades, rendering commitment to abatement politically difficult. 28

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