Diapositiva 1 - University College Cork · Title: Diapositiva 1 Author: Cristina Created Date: 7/16/2016 6:05:35 AM

Centre of Economic

Scenario Analysis and Research

Centre of Econom ic


Consumption vs. Production

Based CO2

Pricing Policies:

Macroeconomic Trade-offs and

Carbon Leakage

Kurt Kratena

International Energy Workshop 2016

University College Cork, 1-3 June

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Centre of Econom ic


The scope of European climate policy

• The European consumer contributes directly

(domestically) and indirectly (globally) to GHG

emissions via the CO2e footprint

• The problem of „leakage‟ in a „unilateral

action‟ scenario of European carbon pricing

• Higher costs of European industry

relocation of energy intensive production

hurting jobs in Europe & no change or higher

GHG emissions globally

• Consumer demand in Europe is the

determinant of leakage

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The problem of leakage

• Two ways to overcome the problem of

„leakage‟ in a unilateral scenario of European

carbon pricing

1) Increase energy/emission productivity

more than the effective energy price

(including the carbon price) by additional

measures (R&D subsidies, regulation, etc.)

2) Tax embodied GHG emissions in order to

reduce European demand

• Comparing 2) with „classical carbon tax‟

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Simulations with EU 27 DYNK Model

• DYNK (DYnamic New Keynesian) model: Hybrid

between econometric IO and CGE; „New

Keynesian‟: full employment in the long-run,

short-run rigidities (liquidity constraints, wage

bargaining)

• EU 27 as one economy, 59 industries, five

household income groups, 47 consumption

categories

• Public budget constraint (stability programme)

as model closure

• Detailed modelling of consumption activities

link to physical energy/emission flows

direct, indirect and imported CO2e footprint

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Consumption Model

• Demand functions and demand systems

• 5 groups of disposable income

Durables

Houses Vehícles Non Durables

HeatingElectricityOther ND

Food Clothing etc.

Public Transport

Fuels

Consumption

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Direct energy demand

• Utilization of durable stock by households,

panel data (EU 27, 1995 – 2012)

– Electricity demand

– Price elasticity: (gheat

– 1) and (gel

– 1)

Eight nondurable non-energy categories

– Budget share equation:

– Price elasticity:

heatel

tel

tel

elel

tapp

teldd

p

K

CPlogloglog

,

,

,

,

g

j

ijijiiP

Cpw loglog g

jiij

i

jiij

j

iC

ij ww

w

p

C

g

log

log

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Centre of Econom ic


Consumption parameters

Price and expenditure elasticity of energy

and non-energy demand of EU households

Nondurable own price expenditure elasticity

Consumption elasticity Time series Cross section

Food -0.14 0.85 0.61

Clothing -0.64 1.04 1.28

Furniture/equipment -1.06 1.11 1.46

Health -0.83 0.98 1.20

Communication -0.89 0.96 0.68

Recreation/accomodation -0.50 1.08 1.27

Financial Services -0.94 1.33 1.00

Other -0.68 1.09 1.00

Energy own price durable stock

Consumption elasticity elasticity

Transport fuel -0.77 1.00

Heating -0.87 1.00

Electricity -0.81 1.00

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Direct household emissions

• Total consumption by quintile (q) &

category

• Energy consumption: monetary physical

units

• Direct GHG emissions:

5,261,26

5,11,1

e

......

..........

..........

......

ee

ee

cc

cc

C

..........

...

..........

...

...

...

...

...

5,1,

5,1,

5,1,

5,1,

5,1,

5,1,

C

jj

elel

heatheat

fuelfuel

vehveh

houshous

cc

cc

cc

cc

cc

cc

C

eeGHG,qGHG, CemEM

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Centre of Econom ic


Production parameters

Parameters for factor demand (price

elasticity, factor bias) and wage functions

own price cross price rate of

Production elasticity elasticity, E/K factor bias

K, all industries -0.95 0.00

L, all industries -0.51 -0.01

E, all industries -0.53 0.02

E, energy intensive -0.37 0.20 0.00

all industries 0.15

M(m) -0.75 0.02

long-run

Wage curve elasticity

Consumer price 0.82

Productivity 0.27

Unemployment rate -0.06

own price expenditure

elasticity elasticity

Food -0.142 0.882

Clothing -0.638 1.010

Furniture -1.057 1.061

Health -0.827 0.977

Communication -0.886 1.031

Recreation -0.504 1.060

Financial services -0.937 1.253

Other -0.684 1.071

own price expenditure

elasticity elasticity

Food -0.142 0.612

Clothing -0.638 1.275

Furniture -1.057 1.463

Health -0.827 1.196

Communication -0.886 0.678

Recreation -0.504 1.271

Financial services -0.937 1.000

Other -0.684 1.000

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Indirect household emissions

• Total energy demand in production (5

energy types): inter-fuel substitution

• Emissions in production

• Indirect domestic GHG emissions by

quintile (q):

ji i

iEitEjiijE

i

iEiiE

i

iEiEE ptppppp,

,,,

2

,,,,0 )log()log()log()log(2

1)log(log gg

tpv itE

ji

iEijEiEiE ,

,

,,,, )log( g

qemEemEMd

GHGe

d

eGHG,jGHG,

q

j

q

j

c

q

c

E

d

d

d

djj

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Imported household emissions

• Total imports in intermediate and final

demand and

• Emissions in imports

• Indirect imported GHG emissions by

quintile (q):

QpSVQpSVIMm

E

m

NE QEQMˆˆ FMf

IMemEMm

GHG

m

GHG

qc

M

d

d

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Policy: Pricing GHG emissions

• Two different taxation schemes: “Green Tax

Reform” and “Environmental Fiscal

Devaluation”

• Green Tax Reform: GHG emissions are taxed

and social security contributions (employers'

and employees') are reduced (ex post public

revenue neutrality)

• Environmental Fiscal Devaluation: GHG

emissions embodied in private consumption

are taxed at the same rate and social

security contributions reduced = special

case of fiscal devaluation (price effects of

currency devaluation by rising consumption

taxes and lowering labour taxes)

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Policy: Pricing GHG emissions

• CO2

tax according to the EU Roadmap: 25 €/t

CO2

in 2015 (in € of 2005) 250 €/t CO2

in

2050 (in € of 2005)

• „Green Tax Reform‟: taxing production and

consumption flows in Europe

• „Environmental Fiscal Devaluation‟: the EU 27

DYNK model gives indirect domestic GHG

emission per unit of private consumption

good (59 commodities)

• Leakage: Indirect imported GHG emission per

unit of private consumption good (59

commodities) from a static multi-regional

input-output (MRIO) model, based on WIOD

(www.wiod.org)

http://www.wiod.org/

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Output price effects of "Green Tax

Reform": difference to BASE in %

-2 0 2 4 6 8 10 12 14

TOTAL

Pulp, paper and paper products

Coke, refined petroleum products

Chemicals, chemical products

Other non-metallic mineral products

Basic metals

Office machinery and computers

Radio, television and communication equipment

Medical, precision and optical instruments

Electrical energy, gas, steam and hot water

Land transport; transport via pipeline services

Air transport services

Public administration and defence services

Education services

Health and social work services

Sewage and refuse disposal services, sanitation

Membership organisation services

Recreational, cultural and sporting services

Difference to baseline in %

2020

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Macroeconomic effects of "Green Tax

Reform": difference to BASE in %

2015 2020 2030 2050

GDP, const. prices -0.69 -2.41 -7.34 -16.95

Private Consumption, const. prices -0.26 -1.41 -4.65 -10.65

Public Consumption, const. prices -2.49 -5.20 -10.87 -17.98

Capital formation, const. prices -0.28 -1.06 -3.51 -8.47

Storage, const. prices -0.09 -0.96 -3.74 -9.68

Exports, const. prices -0.09 -0.95 -3.68 -9.55

Imports, const. prices -0.12 1.48 8.71 24.12

Employment (persons) 0.36 0.35 -0.03 -0.63

Employment (hours) 0.37 0.37 0.01 -0.59

Unemployment (persons) -2.60 -2.84 0.27 12.69

Unemployment rate (% points) -0.32 -0.31 0.02 0.60

GHG emissions, households -5.36 -8.00 -11.80 -14.62

GHG emissions, production -10.23 -18.13 -31.22 -44.62

GHG emissions, total -9.01 -15.62 -26.53 -37.50

GHG emissions, Leakage -0.09 0.23 2.04 10.44

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GDP, energy and emissions:

"Green Tax Reform"

0

20

40

60

80

100

120

140

160

180

200

GDP, const. prices

GDP BASE, const. prices

Final Energy Consumption

GHG emissions, total

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Macroeconomic effects of

"Green Tax Reform"

• Short-run positive impact on labour, long-run

negative on GDP and labour (0.4% points p.a.

less GDP growth): short-run employment double

dividend and significant emission reduction

• Energy (CO2) is not only a factor of production,

but also a consumption good price increases

in the long-run: compensation of labour tax

reduction by employee‟s wage increases

• GHG emission reduction by more than 40%

• „Leakage‟: 1.5% in the short run, 28% in 2050

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Effects of "Green Tax Reform" on

households: difference to BASE in %

2015 2020 2030 2050

Durable consumption, const. prices -0.02 -0.50 -1.57 -2.56

Nondurable consumption, const. prices -0.48 -2.08 -6.59 -14.72

Energy, const. prices -4.75 -7.27 -11.11 -14.75

Real disposable income, const. Prices 2015 2020 2030 2030

Total -0.11 -1.09 -4.16 -10.59

1st quintile -0.96 -2.55 -6.65 -14.05

2nd quintile -0.66 -2.10 -6.02 -13.26

3rd quintile -0.39 -1.62 -5.19 -12.11

4th quintile -0.10 -1.11 -4.27 -10.81

5th quintile 0.24 -0.47 -3.02 -9.00

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Employment effects of "Green Tax

Reform”: difference to BASE in %

-2 -1 0 1 2 3 4 5 6

TOTAL

Food products and beverages

Textiles

Wearing apparel; furs


Printed matter and recorded media




Basic metals

Fabricated metal products

Machinery and equipment


Electrical machinery




2020

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Employment effects of "Green Tax

Reform”: difference to BASE in %

-2 -1 0 1 2 3 4 5 6

TOTAL

Motor vehicles, trailers and semi-trailers


Retail trade services

Hotel and restaurant services



Post and telecommunication services

Financial intermediation services

Research and development services

Other business services


Education services


Other services


2020

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Price effects of "Environmental Fiscal

Devaluation": diff. to BASE in %

-1.6 -1.4 -1.2 -1.0 -0.8 -0.6 -0.4 -0.2 0.0

TOTAL





Basic metals








Education services


Sewage and refuse disposal services, sanitation

Membership organisation services

Recreational, cultural and sporting services


2020

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Macroeconomic effects of "Env. Fiscal

Devaluation": difference to BASE,%

2015 2020 2030 2050

GDP, const. prices 0.26 0.43 0.27 -1.66

Private Consumption, const. prices 0.02 -0.58 -1.95 -3.40

Public Consumption, const. prices 0.17 0.32 0.76 3.36

Capital formation, const. prices -0.03 0.09 0.06 -1.05

Storage, const. prices 0.31 0.91 1.19 -1.58

Exports, const. prices 0.32 0.92 1.28 -1.10

Imports, const. prices -0.84 -2.86 -5.16 0.99

Employment (persons) 0.30 0.74 1.32 2.03

Employment (hours) 0.29 0.72 1.26 1.78

Unemployment (persons) -2.18 -6.09 -13.93 -40.84

Unemployment rate (% points) -0.27 -0.66 -1.21 -1.93

GHG emissions, households -3.61 -7.19 -10.45 -10.16

GHG emissions, production -0.45 -1.56 -3.85 -9.93

GHG emissions, total -1.24 -2.96 -5.44 -9.98

GHG emissions, Leakage -0.37 -1.00 -2.24 -4.16

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GDP, energy and emissions: :

"Environmental Fiscal Devaluation"

0

20

40

60

80

100

120

140

160

180

200

GDP, const. prices

GDP BASE, const. prices

Final Energy Consumption

GHG emissions, total

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Macroeconomic effects of

“Environmental Fiscal Devaluation"

• Short- and log-run positive impact on labour

and on GDP (0.1% points p.a. higher GDP

growth until 2030), long-run employment

double dividend and emission reduction

• Exports increase (lower output prices) and

consumption decreases (higher consumer

prices) devaluation effect (decrease of

imports!)

• GHG decrease less, because taxing

consumption embodied emissions is not an

efficient instrument for emission reduction in

production

• Negative „leakage‟: 30% in the short-run, 42%

in 2050

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Household effects of "Env. Fiscal

Devaluation": difference (%) to BASE

2015 2020 2030 2050

Durable consumption, const. prices 0.22 0.65 1.18 3.68

Nondurable consumption, const. prices -0.04 -1.00 -3.09 -5.34

Energy, const. prices -2.90 -5.91 -8.47 -6.94

Real disposable income, const. Prices 2015 2020 2030 2030

Total 0.16 0.16 0.36 2.83

1st quintile -0.26 -1.48 -3.82 -7.38

2nd quintile -0.09 -0.88 -2.49 -4.51

3rd quintile 0.05 -0.33 -1.06 -1.04

4th quintile 0.19 0.25 0.48 2.80

5th quintile 0.31 0.76 1.99 6.93

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Employment effects of "Env. Fiscal

Devaluation": difference to BASE in %

-3 -2 -1 0 1 2 3 4

TOTAL

Food products and beverages

Textiles

Wearing apparel; furs


Printed matter and recorded media




Basic metals

Fabricated metal products

Machinery and equipment


Electrical machinery




2020

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Employment effects of "Env. Fiscal

Devaluation": difference to BASE in %

-3 -2 -1 0 1 2 3 4

TOTAL

Motor vehicles, trailers and semi-trailers


Retail trade services

Hotel and restaurant services



Post and telecommunication services

Financial intermediation services

Research and development services

Other business services


Education services


Other services


2020

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GHG emissions, with and without

'leakage' in both policy options

0

20

40

60

80

100

120

GHG, Green Tax

GHG, Green Tax w. Leakage

GHG, Envir. Devaluation

GHG, Envir. Devaluation w. Leakage

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Policy conclusions

• Putting the burden on the European producer

& consumer: strong emission reduction,

short-run positive labour market impact, long-

run negative for price-competitiveness

relocation & leakage

• Putting the burden on the European

consumer: weak absolute emission reduction,

short- and long-run positive impact on GDP

and employment, positive for price-

competitiveness negative leakage

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Policy conclusions

• Including leakage in the analysis still shows

much higher emission reduction in the Green

Tax Reform scenario

• An efficient policy integrates Green Tax

Reform with Footprint taxation and

differentiated compensation schemes for

producers and consumers

Documents

Diapositiva 1 - University College Cork · Title: Diapositiva 1 Author: Cristina Created Date: 7/16/2016 6:05:35 AM