EU Emissions Trading: What is at Stake? Volkswirtschaftliches Kolloquium, Ruhr-Universität Bochum 22. January, 2008

Transcription

1 EU Emissions Trading: What is at Stake? Volkswirtschaftliches Kolloquium, Ruhr-Universität Bochum 22. January, 2008

2 Generic Approach to Environmental Policy Analysis Identification of incentive problems (market failures) Design of regulation policies (internalization) Assessment of alternative policy options (trade-offs): - Overall cost implications (efficiency) - Distributional impacts (equity) Theory + Data, Models Applied research based on sound theory: Quantitative evidence Relative importance of theoretical arguments Information basis for rational decision making 2

3 From Theory to Practice: Political Economy of Regulation Asymmetric distribution of costs and benefits Winners and losers of policy-induced structural change: Sectors/firms: production, employment, profits (competitiveness) Households: income (endowments) and expenditure (preferences) Compensation of adversely affected economic agents Deviation from market principles (e.g. polluter pays): Differentiation, exemptions Rebate of scarcity rents: Tax recycling, subsidies Free allocation of permits (allowances) Identification of efficiency trade-offs 3

4 Overview 1. Background 2. Stylized Analysis 3. Simulation Results 4. Conclusions 4

5 1. Background 2. Stylized Analysis 3. Simulation Results 4. Conclusions 5

6 EU-ETS and NAPs EU Emissions Trading System (Directive) Objective: Cost-efficient implementation of Kyoto Protocol under EU-BSA Coverage: Participants (DIR sectors): energy-intensive installations (electricity, iron and steel, paper and pulp, non-ferrous metals) Not included (NDIR sectors): chemicals, transport, household, small emitters Free allocation of emissions allowances National Allocation Plan (NAP) Macro plan: Division of national emission budget between DIR and NDIR sectors Micro plan (for DIR sectors): Installation-specific allocation Definition of general allocation rules Special rules (e.g. early-action) 6

7 Key Issues of EU Emission Regulation Cost efficiency equalized MACs What is at Stake? Compensation lump-sum transfers Non-Discrimination harmonized rules Key issues Segmentation of EU emission markets (one DIR- / multiple NDIR-markets) Political economy of adjustment costs ( alleviated structural change) Multi-jurisdictional legislation (special interests) 7

8 1. Background 2. Stylized Analysis 3. Simulation Results 4. Conclusions 8

9 Efficiency Condition: Equalization of MACs Central planner problem: Minimization of compliance costs: e i i ( ) + τ( ) Min C e e E i i i i First order condition: ' τ = C i τ : international allowance price; C i :emission abatement cost function for sector i e i : emissions in sector i; E : exogenous emission budget Information requirements for segmented markets: E = E = e E = E E International allowance price Abatement options of NDIR sectors * * * * * NDIR NDIR i DIR NDIR i NDIR Optimal allocation factor: λ =E /E * * BaU DIR DIR 9

10 Efficiency Losses of Hybrid Regulation τ - ' C NDIR a ' C DIR ' C N.B.: Implicit equity issue overall cap ( communicating pipes ) no zero-sum burden shifting τ d c b τ e E = E * * NDIR NDIR * E DIR * E exports E * E DIR 10

11 Compensation: Allocation Rules Extension of simple MAC model for commodity market: Maximization of economic surplus (central planner): max = P( sds ) c( μ) q τ( μq E) q, μ q 0 First order conditions: Pq ( ) = cμ ( ) + τμ (1) τ = c '( μ) (2) μ : emission rate; q: output, c( μ ) : unit cost function (constant in q, decreasing in μ ) P(q): inverse commodity demand function Allocation rules: Base: output-based versus emissions-based Time: static (based on historical data) versus dynamic (updating) 11

12 Compensation: Implications of Dynamic Allocation q, μ Decentral profit maximization: max Pq c( μ) q+ τλ ( q+ λ μq μ q) q e First order conditions: Pq ( ) = c( μ) + τμ λ τ λ μτ ; τ (1 λ ) = c'( μ) q e e Equilibrium conditions: ( = E/ q λ ; = / ( ) q λe E μ q ) Output-based allocation Pq ( ) = c( μ) + τμ τ E/ q; τ = c'( μ ) Emissions-based allocation: Pq ( ) = c( μ) + τμ τ E/ q; τ (1 E/( μq)) = c'( μ ) λ q = E/ q: λe = E/ ( μq) : allocation of emission allowances E proportional to production q allocation of emission allowances E proportional to emissions (μq) 12

13 Compensation: Summary Dynamic allocation Output-based rule: production higher than efficient (implicit output subsidies) Emissions-based rule: production higher than efficient specific emissions higher than efficient Static allocation No distortions Alleviation of structural change Trade-off with efficiency No impacts Lump-sum transfer 13

14 1. Background 2. Stylized Analysis 3. Simulation Results 4. Conclusions 14

15 Numerical Simulation Models Partial equilibrium model of emission abatement (MAC curves) Based on Marginal Abatement Cost Curves for sectors within (DIR) and outside (NDIR) the EU Emissions Trading Directive Comprehensive sensitivity analysis: International allowance price ranging from 1 /tco 2 to 20 /tco 2 Allocation factor ranging from λ=80% to λ =100% Generation of MAC curves: Step-wise increase of a CO 2 -tax (in each region) Tax causes emission reduction Resulting pairs are fitted for DIR and NDIR sectors: 2 3 C ( e ) = a ( e e ) + a ( e e ) + a ( e e ) i DIR, NDIR ir ir 1, ir o ir 2, ir o ir 3, ir o ir ir ir ir Computable general equilibrium (CGE) model of EU Member States Multi-sector, multi-region model of the EU (data base: GTAP 5) Incorporation of market interactions and income closures Micro-consistent calibration based on empirical data for technologies and consumer preferences { } 15

16 Efficiency Cost of Segmented Regulation (Germany) Source: Böhringer et al. (2006), EneEco 16

17 Efficiency Cost of Segmented Regulation (Germany) Emissions price λ * Compliance costs * for λ * Compliance costs for λ=1 Absolute excess costs Relative excess costs (in 2002 /t CO2 ) (in mill ) (in mill ) (in mill ) (as a factor of costs*) [5.6] [4.9] [4.4] [4.0] [3.8] [3.6] [3.5] [3.5] [3.6] [3.8] [4.2] [ ] Sensitivity analysis based on CGE simulations Source: Böhringer et al. (2006), EneEco 17

18 Illustration: Burden Shifting between DIR and NDIR Compliance cost for alternative allocation factors at international allowance price of 10 /CO 2 (Germany): λ: allocation factor (allowance allocation to DIR sectors as a ratio of BaU emissions) λ*: computed efficient allocation factor Total (mio ) DIR sectors (mio ) NDIR sectors (mio ) * λ = λ = Source: Böhringer et al. (2006), EneEco 18

19 Compensation and Efficiency: Updating Rules CGE simulations for various EU Member States: Stylized policy target: 10% emission reduction vis-à-vis BaU Policy scenarios: Regulatory Policy International Emissions Trading DIR sectors NDIR sectors AUCTION Emissions trading / auctioning CO 2 tax Yes OUTPUT Emissions trading / output-based allocation CO 2 tax Yes EMISSION Emissions trading / emissions-based allocation CO 2 tax Yes 19

20 Efficiency Costs of Alternative Updating Rules (Germany) 0.6 Consumption (in % from BaU) International allowance price in $US/tC AUCTION OUTPUT EMISSION Source: Böhringer/Lange (2005), SJOE 20

21 Alternative Updating Rules: DIR Production (Germany) Production in DIR sectors (in % from BaU) International allowance price in $US/tC AUCTION OUTPUT EMISSION Source: Böhringer/Lange (2005), SJOE 21

22 1. Background 2. Stylized Analysis 3. Simulation Results 4. Conclusions 22

23 Summary Segmentation of EU carbon markets through EU-ETS: Potentially large efficiency losses (due to missing information or lobbying) Burden shifting between DIR and NDIR sectors Updating of emission allowances: Policy-relevant trade-off between efficiency and compensation Output-based allocation rule superior to emissions-based rule for alleviating structural change Implicit subsidies to DIR sectors at the expense of NDIR sectors Recommendation for mid-term policy design: Comprehensive trading system (upstream) Auctioning of emission allowances 23

24 Further Research Issues Market power (strategic design of NAPs): Segmentation of overall national emission budget Choice of allocation rule Overlap with existing regulation: Environmental/energy taxes Subsidies to renewables (green quota) Political Economy: Evolution of EU Emissions Trading Directive Design of NAPs (e.g. the role of lobbying) Multi-jurisdictional policy context 24

25 Dissemination: A Do-it-yourself Simulation Model ( 25