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Transportation and Emission Trading A CGE Analysis for the EU 15 Jan Abrell EE Dresden University of Technology Chair of Energy Economics and Public Sector Management Infraday 2007 06.10.2007, Berlin - 1 - Agenda Overview

  1. Transportation and Emission Trading A CGE Analysis for the EU 15 Jan Abrell EE² Dresden University of Technology Chair of Energy Economics and Public Sector Management Infraday 2007 06.10.2007, Berlin - 1 -

  2. Agenda • Overview • Model • Results • Conclusion Literature - 2 -

  3. Transportation and Emissions - 3 - Sources: EEA (2003); EEA (2006)

  4. Hybrid Regulation under the EU ETS European Emission Trading System (EU ETS) regulates energy and energy intensive industries as well as refineries Transportation is subject of national environmental policies Efficient environmental regulation requires equal marginal abatement costs in each sector To efficiently regulate the transportation sector the future emission permit price must be known Thus, hybrid regulation induces economic inefficiency due to informational requirements and lobbying - 4 -

  5. Transport and Emission Trading European Commission proposed to include aviation in EU ETS from 2011 onwards Aircraft operators have to hold emission permits (downstream emission trading) Road transportation can be included in either an up- or midstream manner In mid-stream emission trading, producers of cars have to hold emission permits In up-stream emission trading, the producers and importers of gasoline have to hold emission permits How to address emissions from ships? - 5 -

  6. Topic Use a static multi-region CGE model of the EU 15 to answer the question: What are the welfare effects of including road, water, and air transportation in the EU ETS? - 6 -

  7. Agenda • Overview • Model • Results • Conclusion Literature - 7 -

  8. Model Dimensions Static multi-region CGE model Regions: All EU15 countries and rest of the world Sectors: Macro good (industries and services) (MAC) Agriculture (AGR) Energy intensive industries (EINT) Refined oil products (P_C) Electricity (ELY) Fossil Fuels: Coal (COA), natural gas (GAS), crude oil (OIL) Transportation: Air (ATP), water (WTP), other (road/rail) (OTP) Motor vehicles, ships, and aircrafts (CAR) - 8 -

  9. Data and Implementation Use of GTAP 6 database (base year: 2001) International trade margins are incoporated Household’s private transportation is derived by using the Household Budget Survey of 1999 Emissions are calibrated using physical fuel energy flows � Emissions from international transportation are assigned to region sectors belong to Model implementation in GAMS/MPSGE - 9 -

  10. Agenda • Overview • Model • Results • Conclusion Literature - 10 -

  11. Scenarios - Hybrid Regulation Name Description Sectoral carbon constraints: different CO 2 taxes across sectors and regions. Road transportation has a uniform tax rate. SECTORAL ROW: regional emission trading system All regions implement regional emission trading scheme DOMESTIC All sectors in European regions trade allowances across Europe. EUROPEAN ROW: regional emission trading system Electricity, energy intensive industries, and refineries trade allowances across Europe. Remaining sectors are regulated by sectoral taxes; uniform EU ETS TAX tax for road transportation. ROW: regional emission trading system Electricity, energy intensive industries, and refineries trade allowances EU ETS across Europe. Remaining sectors regionally trade allowances. DOM ROW: regional emission trading system - 11 -

  12. Emission Reduction Requirements Implement in each scenario effective emission reduction requirement in 2001 under the EU Burden Sharing Agreement Effective Target Effective Target 2001 (%) 2001 (%) 24.3 Italy 15.0 Austria 12.0 Luxembourg 11.4 Belgium 22.9 Netherlands 15.4 Denmark 10.2 Portugal 12.8 Finland 5.5 Spain 17.1 France 8.2 Sweden -9.7 Germany 2.3 UK 8.5 Greece Ireland 22.6 Rest of the World 5 Source: Own calculations based on EEA (2004); only energy CO 2 emissions are taken into account - 12 -

  13. Results – Hybrid Regulation Hicksian Equivalent Variation of EU 15 welfare compared to bechmark of no carbon regulation (%) 0.00 -0.10 EUROPEAN; -0.16 -0.20 DOMESTIC; -0.21 -0.30 EU_ETS_DOM; -0.29 -0.40 -0.50 EU_ETS_TAX; -0.57 SECTORAL; -0.58 -0.60 -0.70 - 13 -

  14. Scenarios – Transportation under Emission Trading Name Description Electricity, energy intensive industries, refineries, and road transportation trade allowances across Europe. Remaining sectors are regulated by sectoral taxes; uniform tax for road EU ETS TAX R transportation. ROW: regional emission trading system Electricity, energy intensive industries, refineries, road, and air transportation trade allowances EU ETS TAX across Europe. Remaining sectors are regulated by sectoral taxes; uniform tax for road RA transportation. ROW: regional emission trading system Electricity, energy intensive industries, refineries, road, air, and water transportation trade EU ETS TAX allowances across Europe. Remaining sectors are regulated by sectoral taxes; uniform tax for RAW road transportation. ROW: regional emission trading system Electricity, energy intensive industries, refineries and road transportation trade allowances EU ETS DOM R across Europe. Remaining sectors regionally trade allowances. ROW: regional emission trading system Electricity, energy intensive industries, refineries, road, and air transportation trade allowances EU ETS DOM across Europe. Remaining sectors regionally trade allowances. RA ROW: regional emission trading system Electricity, energy intensive industries, refineries, road, air, and water transportation trade EU ETS DOM allowances across Europe. Remaining sectors regionally trade allowances. RAW ROW: regional emission trading system - 14 -

  15. Results – Sectoral Carbon Taxes Hicksian Equivalent Variation of EU 15 welfare compared to SECTORAL scenario (%) 0.50 0.45 EU_ETS_TAX_RA; 0.43 EU_ETS_TAX_R; 0.41 EU_ETS_TAX_RAW; 0.40 0.38 0.35 0.30 0.25 0.20 0.15 0.10 0.05 EU_ETS_TAX; 0.01 0.00 - 15 -

  16. Results – Domestic Emission Trading Hicksian Equivalent Variation of EU 15 welfare compared to DOMESTIC scenario (%) 0.50 0.40 0.30 0.20 0.10 EU_ETS_DOM_RA; EU_ETS_DOM_RAW; EU_ETS_DOM_R; 0.02 0.02 0.02 0.00 -0.10 EU_ETS_DOM; -0.08 -0.20 - 16 -

  17. Agenda • Overview • Model • Results • Conclusion Literature - 17 -

  18. Conclusion Including road transportation in the EU ETS provides high welfare gains Including air transportation also provides welfare gains Environmental policy for maritime shipping has an great impact on international trade patterns via transportation margins Caveat: – Modeling of EU 15 trade with the rest of the world is treated very aggregated – Abatement burden not differentiated across sectors - 18 -

  19. Agenda • Overview • Model • Results • Conclusion Literature - 19 -

  20. Selected References Babiker, M., J. Reilly, and L. Viguier (2004): Is international Emission Trading always beneficial? Energy Journal 25(2), 33-56. Böhringer, C. (2001): Industry-level Emission trading between Power Producers in the EU . Applied Economics 34(4), 523-533. Böhringer, C., T. Hoffmann, and C. Manrique-de-Lara-Penate (2006): The efficiency Cost of separating Carbon Markets under the EU Emission Trading Scheme: A quantitative Assessment for Germany . Energy Economics 28, 44-61. Choumert F., S. Paltsev, and J. Reilly (2006): Improving the Refinig Sector in EPPA . MIT Joint Program on the Science and Policy of Global Change, Technical Note 9. European Environment Agency (2003): Greenhouse Gas Emissions Trends and Projections in the Europe 2003 . Environmental Issue Report 36/2003. Denmark. European Environment Agency (2004): Annual European Community greenhouse gas inventory 1990-2002 and inventory report 2004. Technical Report 2/2004. Denmark. EUROSTAT (1999): Household Budget Survey of 1999 . Luxembourg. EUROSTAT (2001): Annual Energy Statistics . Luxembourg Paltsev, S., H. Jacoby, J. Reilly, and L. Viguier (2004): Modeling the Transport Sector: The Role of Existing Fuel Taxes in Climate Policy . MIT Joint Program on the Science and Policy of Global Change, Report 117. Paltsev, S., L. Viguie, J. Reilly, and K.H. Tay (2004): Disaggregating Household in the MIT EPPA Model . MIT Joint Program on the Science and Policy of Global Change, Technical Report 5. Schäfer, A. , and H. Jacoby (2005): Technological Detail in a multisector CGE Model: Transport under Climate Change . Energy Economics 27, 1-24. - 20 -

  21. Agenda • Overview • Model • Results • Conclusion Literature Appendix: Model Structure - 21 -

  22. Production Structure Except Transportation and Extraction Domestic Exports Output 2 0 VAE σ VAE TRN σ TRN CAR MAC EINT AGR OIL VA σ E ENE OTP ATP WTP σ VA σ DM Fossil σ MM RES ELY CAP LAB Domestic Imported σ FF … AUT … ROW Liquid COA σ LQD GAS P_C 0 CO 2 GAS - 22 -

  23. Production Structure Transportation Services Domestic Output Exports σ OUT 0 VAE σ VAE Transport Equipment Materials σ caga 0 CAR P_C ENE VA σ E WTP OTP ATP EINT AGR OIL σ VA σ FF ELY L K COA GAS - 23 -

  24. Production Structure Extractive Industries (Crude Oil, Natural Gas, Coal) Domestic Output Exports σ OUT σ EXT Materials/ VA RES 0 … … MAC VA OTP σ VA L K - 24 -

  25. Utility Structure C σ HTOP σ HTRN σ CE σ PUR σ HE σ C σ OWN OTP ATP WTP P_C COA ELY GAS P_C MAC EINT AGR σ OTC MAC CAR - 25 -

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