Cooling Down Hot Air

Transcription

1 Discussion Pape No Cooling Down Hot Global CGE nalysis of Post-Kyoto Cabon batement Stategies Chistoph Böhinge

2 Cooling Down Hot Global CGE nalysis of Post-Kyoto Cabon batement Stategies Chistoph Böhinge Zentum fü Euopäische Wtschaftsfoschung (ZEW) Cente fo Euopean Economic Reseach Mannheim ugust 1999 bstact The Kyoto Potocol maks a beak-though in global waming mitigation policies as it sets legally binding emissions tagets fo majo emitting egions. Howeve, ealisation of the Potocol depends on the claification of seveal issues one of which is the pemissible scope of intenational emissions tading between signatoy counties. Unesticted tade poduces hot a when signatoy counties whose Kyoto tagets ae well above the business as usual emissions tade in lage amounts of abundant emission ights. Concens on hot a motivated poposals fo caps on emissions tading by the EU. These caps ae stictly efused by the US and othe non-euopean industialized counties who want to exploit the full efficiency gains fom tade. In this pape we show that thee ae cooling down stategies which can econcile both positions. Intenational pemit tade povides enough efficiency gains to make all signatoy counties bette off than without pemit tade while mitigating hot a. In othe wods, pat of the efficiency gains fom fee tade could be used to pay fo highe abatement tagets of signatoy counties which assue the same envonmental effectiveness as compaed to stictly domestic action o esticted pemit tade. JEL classifications: Q2, Q4, D58 cknowledgement Helpful comments wee eceived by Thomas Osang and Macus Stonzik. None of the views expessed hee should be attibuted to any of ou employes o eseach sponsos

3 Non-technical Summay National paliaments of majo emitting industialized counties such as the US, Japan, Canada o the Russian Fedeation have put acceptance of the Kyoto Potocol unde condition that emissions tading among signatoy counties can be used as a flexible mechanism to meet national eduction tagets. While this stipulation has a clea efficiency ationale, opponents of emissions tading systems such as the EU efe to potential loopholes. Intenational tade in pemit ights may lead to an effective incease of global emissions when signatoy counties whose baseline emissions ae below the Kyoto entitlements sell lage amounts of the abundant emission ights. This phenomenon has been efeed to as hot a. It is paticulaly elevant fo the Russian Fedeation and Ukaine whee pojected emissions fo the Kyoto budget peiod ae well below the assigned amount of emission ights due to the beak-down of domestic economies. In ode to mitigate hot a, the EU and its associates stess the pinciple of supplementaity and call fo estictive ceilings on the amount of tadable emissions. Howeve, these caps ae stictly efused by the US and othe non- Euopean industialized counties who want to exploit the full efficiency gains fom tade. In this pape we show that thee ae cooling down stategies which can econcile both positions. Intenational pemit tade povides enough sufficiency gains to make all abating counties bette off than without pemit tade while mitigating hot a. To put it diffeently, pat of the efficiency gains fom fee tade could be used to pay fo highe aveage abatement tagets of signatoy counties which assue the same envonmental effectiveness as unde stictly domestic action o esticted tade.

4 1 Intoduction The Kyoto Potocol constitutes a milestone in global waming mitigation policies. Fo the fst time, majo emitting egions the so-called nnex B counties - committed themselves to legally binding quantified geenhouse gas emissions limitation and eduction objectives. Howeve, national paliaments of seveal nnex B counties joined within the so-called UMBRELL goup 1 - have put acceptance of the Kyoto Potocol unde condition that emissions tading among signatoy counties can be used as a flexible mechanism to meet national eduction tagets. This stipulation has a clea economic ationale. Emissions tading allows to exploit diffeentials in maginal costs of emissions eduction acoss counties which may significantly educe the total costs of meeting accumulated eduction tagets as compaed to stictly domestic policy measues. Nevetheless, the scope and institutional design of tadable pemit systems is highly disputed among signatoy paties. Opponents of emissions tading systems such as the EU and its associates 2 efe to potential loopholes. Intenational tade in pemit ights may lead to an effective incease of global emissions when signatoy counties whose baseline emissions ae below the Kyoto entitlements sell lage amounts of the abundant emission ights. This phenomenon has been efeed to as hot a (Heold 1998, Geenpeace 1998). It is paticulaly elevant fo the Russian Fedeation and Ukaine whee pojected emissions fo the Kyoto budget peiod ae well below the assigned amount of emission ights due to the beak-down of domestic economies. In ode to mitigate hot a, the EU and its associates stess the pinciple of supplementaity and call fo estictive ceilings on the amount of tadable emissions (Baon et al. 1999). 3 The UMBRELL goup on the othe hand is not willing to foego potential efficiency losses fom tade estictions and has aleady indicated stong esistance to any ceiling plans. s the ealization of the Kyoto Potocol depends cucially on the atification by the UMBRELL goup - in paticula the US a solution to the hot a issue seems to be athe cucial fo an effective climate potection policy The key potagonists of fee emissions tading include the US, Japan, ustalia, Canada, Iceland, New Zealand, Noway, Ukaine and the Russian Fedeation. EU associates include Czech Republic, Slovakia, Coatia, Lettland, Switzeland, Slovenia, Poland and Bulgaia. Othe citical aspects of emissions tading which we do not futhe discuss hee include the cetification, veification and the monitoing of emission eduction as well as the establishment of cedible compliance mechanisms. 1

5 In this pape we analyze altenative ways to mitigate hot a without giving up efficiency gains fom tade in emission ights. The key idea is that signatoy counties unde a system of intenationally tadable pemits adopt moe stingent emission eduction tagets as imposed by the Kyoto Potocol to offset hot a which is excluded by stictly domestic abatement policies. We show that this stategy of cooling down hot a povides a cost-effective, Paeto-supeio solution to all signatoy counties as compaed to abatement policies which patially o fully estict intenational tade in emission ights. Ou quantitative analysis is based on a lage-scale CGE model of the wold economy. The emainde of the pape is as follows. In section 2 we povide some backgound infomation on the post- Kyoto climate change policy discussions. In section 3 we lay out the modeling famewok and baseline paameteization. In section 4 we pesent ou scenaios and discuss the computational esults. In section 5 we summaize and conclude. 2 Policy Backgound The Kyoto Potocol to the United Famewok Convention on Climate Change (UNFCCC 1997) fixes legally binding quantified geenhouse gas emissions limitation and eduction objectives (QELROs) fo nnex B paties. On aveage nnex B paties have committed themselves to educe geenhouse gas emissions by 5.2 % fom 1990 levels in the budget peiod 2008 to Table 1 indicates the commitments fo the industialized counties o egions as epesented in ou modeling famewok. Table 1: Quantified Emissions Limits unde the Kyoto Potocol (Baon et al. 1999) nnex B county o egion Commitments (in % of base yea emissions) United States of meica 93 Canada 94 Euopean Union (incl. EU associates) 91.9 Japan 94 Fome Soviet Union (Russian Fedeation and Ukaine) 100 Othe OECD (ustalia and New Zealand) The developing counties have efused so fa any abatement commitment, mainly because they fea negative effects of emissions limitation on the economic 2

6 development. lso, befoe committing themselves to eduction tagets, they demand pimay action by the developed wold with lage histoical emissions. Duing the Kyoto confeence the UMBRELL goup has declaed ageement on emissions tading as an indispensable element of any potocol. Due to the pessue emissions tading between signatoy counties is now one of the flexible mechanisms 4 intoduced by the Kyoto Potocol. The ules fo emissions tading ae vague, though, and emain to be defined. 5 With espect to the scope of tadable pemits the Kyoto Potocol states that any tading shall be supplemental to domestic action fo the pupose of meeting the obligations. The pinciple of supplementaity was inseted mainly due to concens of the Euopean Union on hot a. Hot a inceases the effective emissions associated with the Kyoto Potocol as paties with actual emissions below taget levels can tade the abundant emission ights. This will be paticulaly elevant fo the Russian Fedeation and Ukaine whee pojected emissions ae well below the Kyoto entitlements as the consequence of a sevee economic decline afte tansfomation to maket economies. 6 Estimates of hot a ange between an amount of million tons of CO 2 which coesponds to 70-90% of the total nnex B eduction commitment (Heold 1998). In May 1999 the EU Council of Ministes issued a concete poposal with estictive caps on the shae of emissions eductions a county might obtain though the use of the Kyoto Potocol s flexible mechanisms (Baon et al. 1999). This poposal faces stiff esistance, howeve, by the UMBRELL goup, in paticula the US, which pefe no limits to emissions tading at all (Loy 1999). The policy backgound as descibed above eveals the need fo stategies that econciles both positions, i. e. mitigate hot a but at the same time exploit the efficiency gains fom tadable emission pemits. In ou simulations below we show that it is indeed possible to cool down hot a and nevetheless make all signatoy counties bette off though emissions tading Othe mechanisms of coopeative implementation include the clean development mechanism (CDM) and joint implementation (JI). Unesolved issues ae, inte alia, the time when tading might stat, the definition of paticipants and gases that might be taded, the establishment of the ules and pocedues fo tading, the institutional set-up and the egulations egading monitoing, veification and ultimately enfocement of the ules. nothe - moal - justification fo supplementaity has been to limit the possibility fo counties to buy themselves out of the obligations. Clealy, this agument contadicts basic pinciples of welfae economics. 3

7 3 nalytical Famewok and Baseline Calibation Fo ou analysis we use a 7-secto, 11-egion geneal equilibium model of the wold economy. The choice of sectos captues key dimensions in the analysis of cabon abatement such as diffeences in cabon intensities and the scope fo substitutability acoss enegy goods and cabon-intensive non-enegy goods. The egional aggegation coves the nnex-b paties as well as majo non-nnex-b egions which ae cental to the geenhouse gas issue. Table 2 summaizes the sectos and egions incopoated in ou model. We povide an algebaic documentation of the model in the appendix. Table 2: Oveview of sectos and counties/egions (Data base: GTP 4, McDougall 1997) Sectos Regions COL Coal US United States CRU Cude oil CN Canada GS Natual gas EUR Euope ROP Refined oil poducts JPN Japan ELE Electicity OOE Othe OECD (ustalia and New Zealand) EIS Enegy-intensive sectos FSU Fome Soviet Union Manufactues and sevices CHN China IND SI MPC ROW India Othe sia Mexico and OPEC Rest of Wold The economic effects of the Kyoto Potocol depend cucially on the extent to which QELROs bind the economies in the budget peiod. In othe wods, the magnitude and distibution of costs associated with the implementation of futue emission constaints depend on the Business-as-Usual (BU) pojections fo GDP, fuel pices, enegy efficiency impovements, etc. In ou compaative-static famewok we infe the BU stuctue of the model s egions fo 2010 using most ecent pojections on the economic development. We then measue the costs of abatement elative to that baseline. s a stating point fo ou fowad pojection we use the GTP 4 database (McDougall 1997) and OECD/IE enegy statistics (IE 1996) fo 1995 which is the most ecent yea fo which a complete set of statistics is available. 7 We use the econciliated benchmak data fo this yea to calibate paametes of the CES functional 7 See Babike and Ruthefod (1997) fo the assembly and econciliation of these data souces. 4

8 foms fom a given set of quantities and pices (given exogenous elasticities). In a second step we do the fowad calibation of the 1995 economies to 2010 incopoating exogenous infomation by the U.S. Depatment of Enegy (DOE 1998) fo GDP gowth, enegy demand and futue enegy pices. The fossil fuel poduction functions ae finally calibated to be consistent with exogenous pice elasticities of supply. typical shotcoming of the compaative-static appoach is the udimentay epesentation how policy intefeence affects investment decisions. In ou abatement scenaios we keep investment at the BU level and ignoe potentially impotant impacts of cabon abatement on the level and patten of investment acoss counties. Ou analytical famewok povides athe consevative estimates of the cost of abatement because we would expect that cabon emission limits will educe the etun to capital and esult in lowe oveall investment and GDP gowth (see e.g. Böhinge and Ruthefod 1999a). 4 Policy Scenaios and Numeical Results 4.1 Policy Scenaios The two initial simulations addess the question to what extent intenational pemit tade between nnex B counties poduces hot a as compaed to stictly domestic abatement: (NTR) (HOT) nnex B counties can tade emission ights as allocated by the Kyoto Potocol only within domestic bodes. Thee is no intenational tade in pemit ights. Emissions tading among nnex B counties assues that the Kyoto tagets ae met in a moe cost efficient way than with NTR. Howeve, pemit tade poduces highe emission levels (hot a) when counties that do not make full use of the emission budget unde NTR sell off abundant emission ights in the intenational maket. We then investigate the efficiency implications of two altenative stategies that achieve the same global emission level as NTR while allowing fo unesticted tade in pemits. We endogenously adjust emissions of OECD egions (US, CN, EUR, JPN, OOE) to keep global emission equal to the NTR emission level. This means that OECD counties commit themselves to the global emission taget associated with NTR athe than just complying with specific Kyoto tagets. We distinguish two vaiants fo 5

9 endogenously scaling OECD emissions entitlements 8 to cool down hot a emeging fom pemit tade: (UNI_NTR) (EQU_NTR) QELROs of OECD counties ae unifomly scaled acoss OECD counties to assue that global emissions do not exceed the NTR emission level. QELROs of OECD counties ae endogenously scaled (i) to assue that the NTR emission level is kept, and (ii) to equalize the welfae gains fom pemit tade acoss OECD counties in pecentage Hicksian equivalent vaiation of NTR income. How does the endogenous benefit shaing ule wok? We cadinalize utility based on a homothetic sepaable social welfae function W W whee W is the welfae index 1 ρ of egion. The welfae impact on egion is measued by changes in W = U /(1 ρ) whee the paamete ρ eflects the degee of avesion to inequality in utilities and U is a linealy homogeneous consumption welfae index (tkinson 1970, Boadway and Buce 1984, Layad and Waltes 1978). In the simulations with endogenous benefit shaing we impose that = W 1 ρ /(1 ρ) W 1 ρ /(1 ρ) = W OECD and detemine allocations of emission ights fo OECD counties endogenously such that the efficiency gains fom tade ae shaed equally acoss tading patnes. W is the efeence welfae level of egion fo the NTR efeence scenaio. We set ρ equal to 1 which implies that efficiency gains fom tade fo the OECD county goup ae distibuted to equalize the pecentage Hicksian equivalent vaiation in income of OECD counties with espect to the NTR income levels. 9 The final set of thee policy simulations deals with the EU poposal fo emission ceilings. Fst, we investigate the efficiency and emission implications of caps on pemit tade as suggested by the EU Council of Envonment (Baon et al. 1999): 8 9 The altenative assumption is to include also the Fome Soviet Union into the scaling mechanism (see Table 5). Note that when ρ = 1,W takes on the fom ln U. 6

10 (CP) Puchases o sales of emissions by nnex B counties may not exceed 5 pecent of the weighted aveage of base yea emissions and the assigned Kyoto emission budget. We then quantify the potential efficiency gains fom full tade while achieving the same level of global emissions as with CP using ou two altenative scaling pocedues: (UNI_CP) (EQU_CP) QELROs of OECD counties ae unifomly scaled acoss OECD counties to assue that global emissions do not exceed the CP emission level. QELROs of OECD counties ae endogenously scaled (i) to assue that the CP emission level is kept, and (ii) to equalize the welfae gains fom pemit tade acoss OECD counties in pecentage Hicksian equivalent vaiation of CP income. Ou compaative-static model measues the costs of implementing Kyoto as compaed to a Business-as-Usual efeence point (BU) in 2010 whee no abatement equements exist. Fo all abatement simulations we assume that evenues fom pemit sales accue lumpsum to the epesentative agent in each egion. In ou exposition of esults maginal abatement costs can be intepeted as the pice of emission pemits which ae eithe taded domestically (NTR) o intenationally (othe cases). 4.2 Results Emission Reduction Requements and Maginal batement Costs unde NTR To undestand the potential fo efficiency gains fom pemit tade we fst investigate the diffeences in maginal abatement costs acoss nnex B counties fo the scenaio NTR whee pemits ae not tadable at the intenational level. Table 3 epots the maginal abatement costs associated with the implementation of the Kyoto tagets though stictly domestic action. Thee ae lage diffeences in maginal abatement costs acoss nnex B counties indicating substantial efficiency gains fom pemit tade. Maginal abatement costs ange between zeo fo FSU and 82$US pe metic ton of CO 2 fo JPN. The magnitude of maginal costs depends inte alia on the level of abatement. The futhe out we ae on the abatement cost cuve the moe costly it gets 7

11 ceteis paibus - to substitute away fom cabon in poduction and consumption. Table 3 summaizes the abatement levels fo the vaious nnex B counties. Note that the Kyoto tagets which appea modest with espect to 1990 emission levels tanslate into much highe effective cutback equements fo OECD counties with espect to the BU emission levels in OOE, fo example, is allowed to incease emissions by 7% ove 1990 levels unde the Kyoto Potocol; nevetheless, this implies an obligatoy decease of moe than 15% in its BU emissions by pat fom the abatement level the maginal abatement costs depend on diffeences in cabon intensity fo diffeent sectos acoss counties. These diffeences explain fo example why JPN faces much highe maginal abatement costs as compaed to US in ode to achieve an almost identical elative cutback of cabon emissions. JPN uses elatively little cabon in sectos with low-cost substitution possibilities, in paticula electicity geneation (due to nuclea powe). s a consequence JPN has to cut back elatively moe emissions in othe sectos such as taffic whee abatement comes moe costly. Table 3: Effective emission cutback equements and maginal abatement costs in 2010 Cutback equement* Maginal abatement costs** CN EUR JPN OOE US FSU * in % fom BU **in $US pe ton of CO2 Table 3 also eveals that FSU is fa off fom facing a binding cabon constaint. While FSU has committed to stabilize its emissions in the budget peiod at 1990 emission levels, its BU emissions in 2010 ae fa below the Kyoto taget. The main eason fo the dop in emissions below 1990 levels is the decline in economic activity (paticulaly in emission-intensive industies) afte the tansfomation of FSU to maket economies. Having no abatement costs at all unde NTR we can safely poject that FSU will be a selle of pemit ights in a tadable pemit system fo nnex B counties Unesticted Tade in Pemits: Efficiency Gains, Hot and Cooling Down Stategies Table 4 summaizes the changes in key economic indicatos when we move fom the NTR to policies which allow fo unesticted tade in pemits among nnex B counties. 8

12 Table 4: Envonmental and economic implications of altenative abatement stategies BU NTR HOT UNI_NTR EQU_NTR. Global emissions (in billion tons of CO 2 ) 30,19 28,51 29,03 28,51 28,51 B. Welfae changes (in %HEV of BU income) OECD -0,24-0,11-0,22-0,21 NNEX B -0,25-0,04-0,09-0,09 NON NNEX B -0,08-0,05-0,06-0,06 GLOBL -0,20-0,04-0,08-0,08 CN -0,87-0,45-0,76-0,85 EUR -0,01-0,03-0,08 0,01 JPN -0,30-0,05-0,11-0,28 OOE -0,65-0,38-0,61-0,63 US -0,40-0,21-0,37-0,38 FSU -0,99 4,08 6,82 6,82 SI 0,13 0,08 0,13 0,12 CHN 0,20 0,07 0,11 0,11 IND 0,27 0,11 0,17 0,17 MPC -0,94-0,46-0,68-0,68 ROW -0,01-0,01-0,01 C. Maginal abatement costs (in $US pe ton of CO 2 ) CN 62,65 12,6 19,97 19,98 EUR 19,02 12,6 19,97 19,98 JPN 81,65 12,6 19,97 19,98 OOE 20,41 12,6 19,97 19,98 US 43,55 12,6 19,97 19,98 FSU 12,6 19,97 19,98 D. Effective cut back equement (wt to 1990 emissions levels) CN 0,94 0,94 0,87 0,81 EUR 0,92 0,92 0,85 0,96 JPN 0,94 0,94 0,87 0,52 OOE 1,07 1,07 1,00 0,98 US 0,93 0,93 0,86 0,86 FSU 1,00 1,00 0,93 1,00 9

13 Fst of all, we see that nnex B tade in pemits poduces hot a with global cabon emissions inceasing by 489 million tons of CO 2 as compaed to NTR (see the diffeence between global emissions unde NTR and HOT in Table 4.). FSU sells a lage amount of its fomely abundant emission ights and takes ove domestic abatement. The patten of pemit tade is detemined by the location of maginal abatement costs unde NTR with espect to the equalized maginal abatement costs fo tadable pemits. Counties whose maginal abatement costs unde NTR ae below the unifom pemit pice will sell pemits and abate moe emissions. In tun, counties whose maginal abatement costs ae above the unifom pemit pice ate will buy pemits and abate less emissions. FSU is the sole selle of pemit ights unde HOT wheeas the othe nnex B counties ae buyes. Nealy all nnex B counties benefit substantially fom tade in pemits. The one exception is EUR whose small welfae losses unde NTR incease slightly due to negative tems of tade effects. The oveall efficiency gains fom pemit tade ae the composition of gains fom equalized maginal abatement costs though tade and fom a elaxation of the global emission constaint due to hot a. To measue the gains fom intenational tade in pemits as compaed to the NTR scenaio popely we have to fix the envonmental taget, i.e. global emission, at the NTR level. We do this in scenaios EQU_NTR and UNI_NTR whee we endogenously scale the pemit allocations of OECD counties to meet the NTR global emission level. Efficiency gains fom intenational tade povide the ationale fo cooling down stategies: On aveage OECD counties should be willing to accept sticte abatement tagets to mitigate hot a because they will nevetheless do significantly bette than unde NTR. Howeve, at the single county level this geneal poposition might not wok out due to negative tems of tade effects (see e.g. EUR in Table 4B.). We may have to scale pemit allocations in a diffeentiated way to poduce a Paeto-supeio outcome fo all tading patnes. Scenaio EQU_NTR epots such a scaling which assues that all OECD counties benefit equally in tems of HEV with espect to NTR. Cooling down hot a futhe incease the welfae gains fo FSU which ae aleady substantial unde HOT. Pemit pices unde UNI_NTR and EQU_NTR go up implying lage evenues fom pemit sales fo FSU. The magnitude of benefits fom tade fo OECD counties and FSU will change significantly depending on whethe FSU is included in the tade-fo-highe-tagets deal o not. If FSU is included, a majo pat of its gains fom pemit sales will be edistibuted among OECD counties (see Table 5). We see that abatement policies in the developed wold poduces non-negligible spilloves to non-abating developing counties. In ou static famewok emission constaints 10

14 fo nnex B counties impove welfae fo most developing counties except fo fossil fuel expotes MPC and ROW. Seconday welfae changes in developing counties ae dectly elated to tems of tade effects, i. e. changes in intenational maket pices. 10 Table 5: Envonmental and economic implications of altenative abatement stategies Welfae* Maginal costs** batement*** CN -0,69 19,77 0,92 EUR 0,17 19,77 1,13 JPN -0,12 19,77 0,83 OOE -0,47 19,77 1,09 US -0,21 19,77 0,98 FSU -0,81 19,77 0,51 SI 0,13 CHN 0,12 IND 0,18 MPC -0,76 ROW -0,02 * in HEV of BU income ** in $US pe ton of CO 2 *** with espect to 1990 emission levels The fall in fossil fuel pices due to educed demands plays a majo ole fo the magnitude and the sign of welfae changes fom tems of tade effects. Regions which ae net impotes of fossil fuels gain, wheeas egions which expot fossil fuels loose. In non-fossil fuel makets, whee taded goods ae diffeentiated by oigin, developed counties ae able to pass on pat of the domestic abatement costs to non-abating developing counties. pat fom highe expot pices of developed counties, developing counties might suffe fom a scale effect as economic activity and hence impot demand by developed counties decline. On the othe hand, thee is an opposite substitution effect as developing counties may gain maket shaes in impot demand of tading patnes because the expots become moe competitive as compaed to abating 10 Böhinge and Ruthefod (1999b) pesent a decomposition method that allows to sepaate tems of tade effects on diffeent makets. 11

15 nnex B counties. Tade in pemits appeas to be welfae deceasing fo most of the developing counties (except fo MPC). The esults that (i) abatement in nnex B counties poduces welfae gains fo most developing counties, and (ii) nnex B pemit tade deceases those gains fo most developing counties should be noted with some caution. Dynamic analysis (see e. g. Böhinge and Ruthefod 1999a) which accounts fo the negative impact of abatement on investment and hence futue capital stocks, i.e. futue consumption possibilities, indicates that welfae losses fom abatement in developed counties ae potentially undeestimated in ou static famewok. s a consequence the negative spill-oves though intenational makets may dominate the positive spill-oves fo developing counties evesing some of ou qualitative esults The EU Poposal: Caps on Tade pat fom the questionable attempt to limit the buy themselves out possibilities fo nnex B counties the EU poposal fo caps on pemit sales and puchases aims pimaily at mitigating hot a. s can be seen fom Table 6 the EU poposal in fact educes hot a substantially. Howeve, the ceilings imply a loss in economic efficiency as one can not exploit lowe cost abatement options acoss nnex B counties to the full extent possible. To mateialize the efficiency gains associated with the EU poposal we apply once again ou cooling down stategies taking the effective global emissions unde CP as the efeence taget. chieving the same level of envonmental quality, i. e. emissions, as unde CP the efficiency losses of cooling down stategies is significantly below the loss fom CP. 5 Conclusions Only ecently, the EU and associated patnes have poposed caps on emissions tading to mitigate hot a. These caps ae stictly efused on behalf of the US and othe membes of the so-called UMBRELL goup who want to exploit the full efficiency gains fom tade. In this pape we have shown that thee ae cooling down stategies which can econcile both positions. Intenational pemit tade povides enough sufficiency gains to make all nnex B counties bette off than without pemit tade while mitigating hot a. To put it diffeently, pat of the efficiency gains fom fee tade could be used to pay fo highe aveage abatement tagets of signatoy counties which assue the same envonmental effectiveness as unde stictly domestic action (NTR) o esticted tade (CP). 12

16 Table 6: Envonmental and economic implications of EU cap stategy NTR HOT CP UNI_CP EQU_CP. Global emissions (in billion tons of CO 2 ) 28,51 29,03 28,74 28,74 28,74 B. Welfae changes (in %HEV of BU income) OECD -0,24-0,11-0,20-0,16-0,16 NNEX B -0,25-0,04-0,17-0,06-0,06 NON NNEX B -0,08-0,05-0,07-0,06-0,06 GLOBL -0,20-0,04-0,15-0,06-0,06 CN -0,87-0,45-0,72-0,61-0,68 EUR -0,01-0,03-0,03-0, JPN -0,30-0,05-0,17-0,08-0,13 OOE -0,65-0,38-0,58-0,50-0,54 US -0,40-0,21-0,36-0,30-0,32 FSU -0,99 4,08 1,31 5,52 5,52 SI 0,13 0,08 0,11 0,11 0,11 CHN 0,20 0,07 0,15 0,09 0,09 IND 0,27 0,11 0,21 0,14 0,14 MPC -0,94-0,46-0,74-0,58-0,58 ROW -0,01-0,01-0,02-0,01-0,01 C. Maginal abatement costs (in $US pe ton of CO 2 ) CN 62,65 12,6 38,90 16,54 16,55 EUR 19,02 12,6 27,86 16,54 16,55 JPN 81,65 12,6 45,18 16,54 16,55 OOE 20,41 12,6 27,86 16,54 16,55 US 43,55 12,6 27,86 16,54 16,55 FSU 12,6 16,54 16,55 D. Effective cut back equement (wt to 1990 emissions levels) CN 0,94 0,94 0,94 0,90 0,85 EUR 0,92 0,92 0,92 0,88 0,96 JPN 0,94 0,94 0,94 0,90 0,77 OOE 1,07 1,07 1,07 1,03 0,99 US 0,93 0,93 0,93 0,89 0,87 FSU 1,00 1,00 1,00 0,96 1,00 13

17 bstacting fom lump-sum tansfes we have detemined initial pemit allocations which imply an equitable shaing of efficiency gains acoss signatoy counties. Of couse, ou quantitative esults will depend cucially on ou baseline pojections which detemine the magnitude of hot a. When GDP (emission) pojections fo FSU ae highe than in ou baseline scenaio, hot a in the context of the Kyoto Potocol becomes less impotant. et, beyond the cuent debate on hot a unde the Kyoto Potocol, it should be noted that moe geneally hot a is a poblem of defining pope baselines. When egions negotiate emission baseline that lie beyond the cedibly pojected emissions, these egions ae pimay candidates fo poducing hot a in tadable pemit systems. Obviously, the pospects fo tade in pemits povides a stong incentive fo counties to ovestate expected emissions. t the global level this entails the isk of diving up the wold-wide emission level. In essence, the debate on hot a o baseline pojections then boils down to the cental issue of buden shaing. Howeve, as indicated by ou simulations, accepting exaggeated claims fo emission ights and tying to avoid hot a though caps in tade may tigge significant efficiency losses. The wold community will do much bette to seach fo fa initial allocations of pemits ights based on cedible emissions pojections and allow fo fee pemit tade. The latte educes the costs of emission abatement at the global level, while the fome addesses the question how costs (cost savings) should be divided up. Ou quantitative analysis of post-kyoto abatement stategies povides hence an illustative example of issues that ae likely to play themselves out at the global level in the futue when developing counties will have also to adopt emission constaints. Refeences tkinson,.b. (1970), On the Measuement of Inequality, Jounal of Economic Theoy, 2, Babike, M. and T.F. Ruthefod (1997), Input-Output and Geneal Equilibium Estimates of Embodied Cabon: Dataset and Static Famewok fo ssessment, woking pape 97-2, Univesity of Coloado, Boulde. Baon, R. et al. (1999), Peliminay nalysis of the EU Poposals on the Kyoto Mechanisms, Enegy and Envonment Division, Intenational Enegy gency, 14

18 Boadway, R.W. and N. Buce (1984), Welfae Economics, Cambidge (M), Basil Blackwell. Böhinge, C. and T.F.Ruthefod (1999a), Wold Economic Impacts of the Kyoto Potocol, in Welfens, P.J.J, Hilleband, R. and. Ulph (eds.): Intenalization of the Economy, Envonmental Poblems and New Policy Options, New ok, Spinge (fothcoming). Böhinge, C. and T.F.Ruthefod (1999b), Decomposing Geneal Equilibium Effects of Policy Intevention in Multi-Regional Tade Models - Method and Sample pplication, ZEW discussion pape 99-36, Mannheim. DOE (1998), Depatment of Enegy, nnual Enegy Outlook (EO 1998), Enegy Infomation dministation Geenpeace (1998), UN Famewok Convention on Climate Change, meeting of subsidiay bodies, position pape, 2-12 June, Bonn. Heold,. (1998), Hot and the Kyoto Potocol, in WWF/ Foum on Envonment&Development (eds.).: Emissions Tading in Intenational Climate Potection, poceedings, Bonn, IE (1996), Intenational Enegy gency, Enegy Pices and Taxes / Enegy Balances of OECD and Non-OECD counties, Pais, IE publications. Layad, P.R.G. and.. Waltes (1978), Micoeconomic Theoy, New ok, McGaw-Hill, p. 48. Loy, F.E. (1999), Heiße Luft aus de Euopäischen Union, FZ Fankfute llgemeine Zeitung, McDougall, R.. (1997), Global Tade, ssistance and Potection: The GTP 4 Data Base, Cente fo Global Tade nalysis, Pudue Univesity, West Lafayette. UNFCCC (1997), United Nations Convention on Climate Change, Kyoto Potocol to the United Nations Famewok Convention on Climate Change, FCCC/CP/L.7/dd1, Kyoto. 15

19 lgebaic ppendix This appendix povides an algebaic summay of the equilibium conditions fo ou compaative-static model designed to investigate the economic implications of the Kyoto Potocol in 2010 as compaed to a Business-as-Usual economic development whee no cabon abatement policies apply. Befoe pesenting the algebaic exposition we state ou main assumptions and intoduce the notation. Nested sepaable constant elasticity of substitution (CES) functions chaacteize the use of inputs in poduction. ll poduction exhibits non-inceasing etuns to scale. Goods ae poduced with capital, labo, enegy and mateial (KLEM). epesentative agent (R) in each egion is endowed with thee pimay factos: natual esouces (used fo fossil fuel poduction), labo and capital. The R maximizes utility fom consumption of an CES composite which combines demands fo enegy and non-enegy commodities. Supplies of labo, capital and natual esouces ae exogenous. Labo and capital ae mobile within domestic bodes but cannot move between egions; natual esouces ae secto specific. ll goods, except fo coal and cude oil, ae diffeentiated by egion of oigin. Constant elasticity of tansfomation functions (CET) chaacteize the diffeentiation of poduction between poduction fo the domestic makets and the expot makets. Regading impots, nested CES functions chaacteize the choice between impoted and domestic vaieties of the same good (mington). Cude oil and coal ae impoted and expoted as homogeneous poducts. Lump sum tansfes of the R finance the exogenous govenment demands in each egions and the govenment tansfes all evenues fom cabon pemits to the R. Two classes of conditions chaacteize the competitive equilibium fo ou model: zeo pofit conditions and maket cleaance conditions. The fome class detemines activity z levels and the latte detemine pice levels. In ou algebaic exposition, the notation Π is used to denote the pofit function of secto j in egion whee z is the name assigned to the associated poduction activity. Diffeentiating the pofit function with espect to input and output pices povides compensated demand and supply coefficients (Shepad s lemma), which appea subsequently in the maket cleaance conditions. We use i (aliased with j) as index fo commodities (sectos), (aliased with s) as index fo egions and d as index fo the demand categoy (d=: intemediate demand, d=c: pivate household demand, d=g: investment demand, d=i: investment demand). The label EG epesents the set of enegy goods and the label FF denotes the subset of fossil 16

20 fuels. Tables.1.6 explain the notations fo vaiables and paametes employed within ou algebaic exposition..1 Zeo Pofit Conditions 1. Poduction of goods except fossil fuels: Π = η 1 η KLE KLE 1- X X X ( + ( 1 ) ) 1 E E 1 - σ σ E σ L K KLE θ p p p KLE θ η θ j j θ [ θ p +( 1- ) α ( w j α v j ) ] = 0 i FF θ j EG 2. Poduction of fossil fuels: Π = ( ) 1 1 σ Q 1 σ Q 1 η 1 η 1 X X X + ( 1 ) 1 Q σ Q Q FF FF FF θ - + (1 ) + + p θ p η θ q θ θ L w θ K v θ pj = 0 i FF j j 1 3. Secto-specific enegy aggegate: Π E = p E - θ CO p 1 σ CO {, CO, } 4. mington aggegate: + (1 θ CO ) θ ELE p 1 σ ELE {, ELE, } + (1 θ ELE ) Π j LQ p β j j 1 σ ELE 1 σco 1 σ ELE 1 1 σ CO =0 Π d = p d σ 1-1- σ σ M CO2 CO2 ( θ p + (1 ) p ) + t a d = 0 d θ d 5. ggegate impots acoss impot egions: Π M M M 1- M = p - σ θ is p is s 1 1-σ M = 0 17

21 6. Investment: Π I = p I - i θ I p I = 0 7. Public good poduction: Π G = p G - i θ G p G = 0 8. Household consumption demand: Π C = p C - θ E C p E 1-σ EC C +(1-θ E C ) i p γ C EG ) 1-σ EC 1 1-σ EC = 0 9. Household enegy demand: Π E C = p E C 1 1-σ ELE, C 1-σ ELE, C σ, {,, }, (1 {,, }) σ 1-σ NELE E 1- ELE C E E 1- NELE - θ + θ ) ELE C pele ELE C = 0 `{ } ( θ ic pc i EG ELE 1.2 Maket Cleaance Conditions 10. Labo: L = i w 11. Capital: L = i w 18

22 12. Natual esouces: Q = q i FF 13. Output fo domestic makets: p = dj dj p dj 14. Output fo expot makets: p X = s M is p M is X 15. Secto specific enegy aggegate: E = p E 16. Impot aggegate: M = d d p d M 17. mington aggegate: d = j j p j d +C p C d + I p d I + G p G d 18. Household consumption: C p C =( w L +v K + j FF q j Q j + t CO2 CO2 + p G G + p I I + B 19

23 19. ggegate household enegy consumption: E C =C p C E C 20. Govenment output: G = G 21. Investment: I = I 22. Cabon emissions: CO d 2 = d CO2 di t 20

24 Table.1: Sets i j s EG FF LQ d Sectos and goods liased with i Regions liased with ll enegy goods: Coal, cude oil, efined oil, gas and electicity Pimay fossil fuels: Coal, cude oil and gas Liquid fuels: Cude oil, efined oil and gas Demand categoies: = intemediate, C = household and I = investment Table.2: ctivity vaiables Poduction in secto i and egion E ggegate enegy input in secto i and egion M ggegate impots of good i and egion d mington aggegate fo demand categoy d of good i in egion I ggegate investment in egion G ggegate public output in egion C ggegate household consumption in egion EC ggegate household enegy consumption in egion 21

25 Table.3: Pice vaiables p Output pice of good i poduced in egion fo domestic maket X p Pice of aggegate enegy in secto i and egion p E Pice of aggegate enegy in secto i and egion p M Impot pice aggegate fo good i impoted to egion p d Pice of mington aggegate fo demand categoy d of good i in egion p I Pice of investment demand in egion p G Pice of govenment demand in egion p C Pice of aggegate household consumption in egion p E C Pice of aggegate household enegy consumption in egion w Wage ate in egion v Pice of capital sevices in egion q Rent to natual esouces in egion (i FF) CO2 t Pice of CO 2 pemit in egion 22

26 Table.4: Cost shaes X θ θ j KLE θ E θ T α Q θ FF θt θ CO θ ELE β j θ M is θ d θ I θ G θ E C Shae of expots in secto i and egion Shae of intemediate good j in secto i and egion (i FF) Shae of KLE aggegate in secto i and egion (i FF) Shae of enegy in the KLE aggegate of secto i and egion (i FF) Shae of labo (T=L) o capital (T=K) in secto i and egion (i FF) Shae of natual esouces in secto i of egion (i FF) Shae of good i (T=i) o labo (T=L) o capital (T=K) in secto i and egion (i FF) Shae of coal in enegy demand by secto i in egion (i FF) Shae of electicity in non-coal enegy demand by secto i in egion Shae of fossil fuel j in enegy demand by secto i in egion (i FF, j LQ) Shae of impots of good i fom egion s to egion Shae of domestic vaiety i in mington aggegate fo demand categoy d in egion Shae of good i in investment fo egion Shae of good i in govenment demand in egion Shae of enegy in aggegate household consumption in egion γ θ E ELE C, θ E ic Shae of non-enegy good i in non-enegy household consumption demand in egion, Shae of electicity in aggegate household enegy consumption in egion Shae of non-electic enegy good i in the non-electic household enegy consumption in egion 23

27 Table.5: Endowments and emissions coefficients L ggegate labo endowment fo egion K ggegate capital endowment fo egion Q Endowment of natual esouce i fo egion (i FF) G ggegate govenment demand in egion I ggegate investment demand in egion B Balance of payment suplus in egion (note: = 0 B ) CO2 Endowment of cabon emission ights in egion cab ad Cabon emissions coefficient fo fossil fuel i (i FF) in demand categoy d of egion 24

28 Table.6: Elasticities η σ KLE σ FF σ CO σ ELE Tansfomation between poduction fo the domestic maket and poduction fo the expot Substitution between enegy and value-added in poduction (except fossil fuels) Substitution between natual esouces and othe inputs in fossil fuel poduction calibated consistently to exogenous supply elasticities µ FF. Substitution between coal and the non-coal enegy in poduction (except fossil fuels) Substitution between electicity and the non-coal fossil fuels in poduction (except fossil fuels) µ CO =0.5 µ CRU =1.0 µ GS =1.0 σ M Substitution between impots fom diffeent egions 8 σ σ ELE,C Substitution between the impot aggegate and the domestic input Substitution between electicity and the non-electic enegy in household enegy consumption σ NELE Substitution between non-electic