Impact of Australia s Greenhouse Gas mitigation Policies on Competitiveness and Trade

Transcription

1 Impact of Australia s Greenhouse Gas mitigation Policies on Competitiveness and Trade Abstract 1 Introduction Following the Kyoto Protocol Targets, Australia introduced a carbon price mechanism unilaterally to curb domestic emissions. A fixed carbon price of A$23 tonnes per CO2-e has been in operation since 1 July 2012 with a price increasing to A$24.15/tonne and in year 2013 and A$25.14/ tonne in year After three years of fixed charged period the mechanism will then be entered into an emissions trading scheme and the carbon price will be decided by the market forces. However, there are still concerns on the design of the carbon price mechanism, with many aspects yet to be determined. This is mainly because Australia s energy is derived from fossil fuels which are heavily emissions intensive. Therefore, a carbon tax or emissions trading (carbon price mechanism) increase the cost of production of goods and services that use fossil energy or energy intensive materials. As a result, unilateral carbon constraints imposed by Australia increases the cost of production of industries that compete with similar products and services (i.e. international market share of exports and imports) of non-carbon constrained trading partners. As a result, the comparative advantage enjoyed by the emissions intensive trade exposed sectors (EITE) of the economy may reduce the production, in part, shift their economic activity, jobs and emissions to overseas key trading partners where comparable regulations are not in practice. This study aims to quantify the potential competitiveness effect on Australian EITE sectors and to quantify the trade effect on major trading partners of Australia from the carbon price to regulate greenhouse gases. For this purpose, a multi-sectoral, multi-regional computable general equilibrium model (GTAP-E, Version 8) is employed which has a detailed specification of energy substitution possibilities and a carbon accounting mechanism. This model is used to simulate Australia s unilateral carbon prices. The analysis shows that at a A$23/tonne there is not likely to be a significant competitiveness impact on EITE sectors. However, some EITE sectors may face competitive pressure from major trading partners as their energy costs rise with the imposition of carbon price. These impacts could be addressed through sector-specific policy measures, and the study outlines some counterfactual policy options to mitigate adverse impacts. Use of GTAP-E version in this particular research area is very important in many ways. Firstly, GTAP-E is a static multi-regional computable general equilibrium model of the world economy with an extension of energy substitution both for inter-fuel and fuel factor substitution possibilities.

2 This paper proceeds as follows. Section 2 reviews related literature on the use of Computable General Equilibrium approach to carbon tax modelling. Section 3 presents Structure of the GTAP-E version 8 and explains details of sector and regional classification used to obtain projections. Section 4 defines simulation scenarios and draws projections and interprets the results. Final section discusses concluding remarks. Review of literature This review will focus more on the use of GTAP-E version on the carbon tax. Carbon emissions base in countries Figure Mt CO AUS CHN JPN USA KOR SGP GBR NZL IND THA MYS ROW Model and Data We employ GTAP-E version which is an extension of a standard GTAP model constructed by the Global Trade Analysis Project (GTAP) team. GTAP-E additionally incorporates energy substitution both for inter-fuel and fuel by fuel type. Therefore, the model is capable of estimating carbon emission from fuel combustion. Furthermore, the GTAP-E allows a mechanism to trade carbon emissions internationally. Results

3 The introduction of carbon tax in Australia has resulted in increase of real energy price index for all energy commodities in Australia while all other major trading partners experienced a decrease in real energy price index. Table 1 Percentage change in the real energy price index for Australia Energy commodity AUS coal oil 0.23 gas 23.3 oil products 9.81 electricity There can be seen very significant increase in the energy price index for coal followed by gas and electricity in Australia. This is mainly because coal is very high in carbon content and basically Australia s electricity is coal-based. Energy price index of oil products has also increased by 9.8 percent which mainly constitute of petroleum and other coal products. The most interesting observation of this carbon tax in Australia has resulted in decrease in the energy price index of all other major trading partners. Following bar chart shows percentage change in energy price index of major trading partners followed by a carbon tax in Australia. Figure 1 percentage change in energy price index of major trading partners of Australia MYS THA IND NZL GBR SGP KOR USA JPN CHN electricity oil_pcts gas oil coal As shown in Figure 1 real energy price of coal in all countries has significantly reduced following the carbon price in Australia. The price reduction is highest in Japan (-0.57%) followed by Korea (-0.28%), India (-0.25%) and Malaysia (-0.23%). All other real energy prices have decreased by varying proportions in all major trading partners to Australia. As a result we can expect energy consumption in those countries will increase due to carbon price in Australia. Therefore, implementation of carbon tax in Australia will impact positively on the reduction of emissions in Australia and

4 negatively on the increase of emissions in other countries. Table 2 shows percentage reduction in carbon emissions by Australia and all other major trading partners by the fuel type. Table 2 Percentage reduction in carbon dioxide emissions by country by fuel type Country coal oil gas oil_pcts emissions quota AUS CHN JPN USA KOR SGP GBR NZL IND THA MYS ROW Australia s carbon emissions reduce significantly by all energy types and overall reduction in emissions is 23 percent. As expected, coal contributes to the highest reduction in emissions (35%) followed by gas (16%), oil (7%) and oil products (6%). Interestingly overall emissions in India and Singapore have reduced by 0.14 percent and 0.08 percent. In India this reduction has mainly brought from the reduction in emissions from coal (0.22%) and gas (0.06%). A careful observation of this simulation finds that emissions of certain energy sectors in some of the major trading partners have declined although the overall contribution is positive. For example, in China emissions from oil has reduced by 0.09 percent and emissions from gas has reduced by 0.34 percent, but overall emissions has increased by 0.01 percent. Therefore, we can conclude that Australia s carbon tax policy has created impacts to a certain extent on the emissions reduction in other countries. Sectoral emission reduction in Australia The sectoral emission reduction shows varying impacts to the overall emission reduction in Australia. The highest emission reduction is projected in the electricity sector which is 72 Mt CO2. This emission reduction contributes 82 percent of the total emission reduction achieved in Australia from the carbon price. Other two major sectors that have contributed to overall emission reduction are other industries and services sector (Oth-Ind_ser - 5.3%) and non-ferrous mining sector (Nfm - 4.5%). Following graph displays percentage reduction in carbon emission by all 10 sectors. The oil sector shows slight increase in emissions by 2 percent which could be mainly due to very small emissions base associated with the oil sector.

5 Oth_ind_ser Fmp Nfm I_s Nmm Crp Electricity Oil_pcts Wpp txlh Omn Gas Oil Coal Agr Percentage reduction in carbon emissions Trade and competitiveness impacts Following the carbon price, Australia shows overall positive trade balance whereas all ten major trading partners and the rest of the world indicate negative trade balance. This is somewhat promising for Australia s trade because mostly it is speculated that carbon price would harm Australia s trade competitiveness. As shown in table Australia experienced a positive trade balance of US $ 8,362 million. The United States shows the highest negative impact from the Australia s carbon price, as her trade balance has decreased to $US 1,983 million. The second highest impact is shown in Japan which trade balance has reduced to $US 1,106 million. Table: Change in trade balance (Exports Imports) $US million Country Change in trade balance AUS CHN JPN USA KOR SGP GBR NZL IND THA MYS ROW

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