Climate policy and competitiveness: A North American perspective from

CGE modelsNic Rivers

Porter Hypothesis at 20 SymposiumMontreal, June 27-28, 2010

Computable general equilibrium models are widely used

• Much applied research exploring climate change policy, competitiveness, and leakage is conducted using computable general equilibrium models with a significant level of commodity detail

• Example 1 – several high-profile studies attempted to estimate the impact of HR.2454 (Waxman-Markey) on US economic output and competitiveness:– FFEAT model used by EPA/EIA interagency report (2009)– ADAGE and IGEM models used by EPA (2009)– EPPA model used by MIT (2009)– NEMS model (hybrid) used by EIA (2009)

• Example 2 – several studies attempt to estimate impact of proposed policies on Canadian economic output and competitiveness:– Dissou et al. (2003), Dissou (2005, 2006)– Wigle (2001)– Böhringer and Rutherford (2010)– Rivers (2010)– CGE models are run by Finance Canada and Environment Canada

Typical findings: climate change policy and competitiveness

• Market-based climate policy is likely to increase production costs for certain energy-intensive industries. This will reduce international competitiveness of these industries.

• The process for allocation of allowances – auction, grandfathering, or output-based – can have significant impacts on international competitiveness

• Non energy-intensive sectors may experience reduced costs via general equilibrium effects (e.g., reduced input costs due to lower demands)

Competitiveness impacts of HR.2454 in the US

Source: Interagency Report on HR.2454, 2009

US$20/tCO2 allowance priceUS$20/tCO2 allowance price

Impact of allowance distribution

Competitiveness impacts of 20% reduction in GHG by 2020 in Canada

Source: Rivers, 2010, Energy Economics.

Impact of allowance distribution

$100/tCO2 allowance price$100/tCO2 allowance price

CGE models and the Porter Hypothesis

Most disaggregate applied CGE models do not currently represent policy-induced innovation well.- Innovation is typically exogenous (AEEI or backstop technologies) or is limited to a very small portion of the economy (electricity generation)- Models with a detailed representation of innovation (research and development, learning by doing, spillovers, crowding out, etc.) are typically too aggregated to be used for applied analysis of policies and competitiveness- In most applied policy models, the Porter Hypothesis is ruled out by assumption

Most disaggregate applied CGE models do not currently represent policy-induced innovation well.- Innovation is typically exogenous (AEEI or backstop technologies) or is limited to a very small portion of the economy (electricity generation)- Models with a detailed representation of innovation (research and development, learning by doing, spillovers, crowding out, etc.) are typically too aggregated to be used for applied analysis of policies and competitiveness- In most applied policy models, the Porter Hypothesis is ruled out by assumption

Is this a problem?

• In climate change policy, competitiveness concerns are most prevalent for energy-intensive and trade-exposed industries– Primary aluminum: 22% energy intensity– Chlorine and alkalies: 24%– Flat glass: 16%– Lime: 23%

• Because of high energy costs, these industries invest substantially in energy efficiency, audits, training, personnel, etc.: energy decisions may be “close” to rational– E.g. all steel mills and petroleum refineries in Canada participate in a

“benchmarking” study to understand their full process energy efficiency compared to other plants and a hypothetical state of the art plant

Source: Interagency Report on HR.2454, 2009