A look inwards: carbon tariffs versus internal
improvements in emissions-trading systems
Marco Springmann
(formerly at DIW Berlin)
RFF, Washington DC
September 5, 2012
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Context
Many recent climate-policy proposals contain provisions for
carbon tariffs (BCAs):
In the US: Waxman-Markey (HoR), Kerry-Boxer,
Cantwell-Collins (Senat)
In the EU: Revised directive of the EU ETS
The objectives for implementing carbon tariffs are to:
reduce carbon leakage;
avoid negative competitiveness impacts of domestic industries;
increase the cost-efficiency of domestic abatement efforts.
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Context
However, economic analyses paint a mixed picture:
Some find that BCAs could be partially successful in reducing
carbon leakage and in restoring the competitiveness of
domestic industries (Böhringer et al., 2011; Burniaux et al.,
2010; Winchester et al., 2011; Fisher and Fox, 2009).
Others find only small overall effects and little potential for
reducing leakage (McKibbin and Wilcoxen, 2008; Dong and
Whalley, 2009; Peterson and Schleich, 2007).
However, many studies agree that BCAs place considerable
burden on those developing countries against whose products
BCAs are imposed (Babiker and Rutherford, 2005; Dröge and
Kemfert, 2005; Mattoo et al., 2009).
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Context
⇒ BCAs are politically contentious:
China sees BCAs as trade protectionism, illegal under WTO
law, and threatened with trade war.
BCAs are at odds with industrialized countries’ commitments
within the UNFCCC and could impede negotiations on a global
climate agreement.
BCAs perpetuate Kyoto dichotomy:
Divide countries into potentially tariff-imposing Annex I
countries and targeted non-Annex I countries.
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Kyoto dichotomy: not so clear-cut
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Kyoto dichotomy: not so clear-cut
Several non-Annex I countries, such as China and South
Korea, are planning to implement ETS within this decade.
Many Annex I countries, such as the USA and Canada, have
not yet adopted comprehensive carbon-pricing policies.
Existing ETS, such as the EU ETS and RGGI, are plagued by
problems of overallocation.
⇒ Before extending domestic emissions regulation through
implementing carbon tariffs, it might be more appropriate for
Annex I countries to further the improvement of domestic
climate policies and to link existing and planned ETS.
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
External vs. internal efficiency improvements
From an economic perspective, both policies can increase
cost-efficiency of A1 domestic abatement efforts:
Carbon tariffs induce external efficiency improvements through
indirect regulation.
Expansion and linking of A1 ETS induce internal efficiency
improvements through better distribution of abatement burden.
Although in principle both policies could be pursued together,
they are likely to preclude each other politically due to the
incompatibility of incentive structures:
BCAs are politically confrontational and inconsistent with
cooperative initiatives aimed at linking ETS.
Linking ETS across A1 can be interpreted as first step for
linking to NA1 ETS, which would remove the basis for BCAs.
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Study outline
This study:
Assesses the potential economic gains from extending the
sectoral and regional coverage of A1 ETS vis-a-vis the
implementation of carbon tariffs on imports from NA1.
⇒ Seeks to answer the question whether besides the political
appeal, there exists also an economic rationale for pursuing
internal efficiency improvements from ETS enhancement over
external ones from implementing carbon tariffs.
Method:
Cost-effectiveness analysis with an environmental CGE model
of the global world economy.
Implementation of ETS and carbon-tariff policy trajectories.
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
ETS scenarios
ETS scenarios are informed by current climate-policy
fragmentation:
ETS exist in several A1 regions: EU (EU ETS), New Zealand
(NZ ETS), several US regions (AB32 in California, RGGI in
northeastern and mid-Atlantic states), and in Tokyo (Japan).
ETS are foreseen to be implemented in the next few years in
western US states (WCI) and Australia.
Most ETS are hybrid ones with partial sectoral coverage.
⇒ Reference scenario: regional-hybrid ETS
non-linked ETS in each A1 region;
sectoral ETS coverage: ELE, OIL, EIT;
20% total A1 reduction target (5% reduction target for
non-ETS sectors; ETS targets scale endogenously by region).
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Policy trajectories
Policy trajectories represent choice between implementing
carbon tariffs or pursuing A1 ETS extension:
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Carbon-tariff scenario
Carbon-tariff scenario:
Informed by current US and EU proposals, but still idealized
in political terms.
A1 levies carbon tariffs on EIT imports from NA1.
Tariff level is proportional to carbon content of imports from
NA1 and price of carbon in A1.
Carbon content computed from all direct and
electricity-related CO2 emissions.
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Model results – Welfare
A1’s welfare increases in all policy scenarios.
Greatest welfare gains result from full ETS expansion.
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Model results – Welfare
NA1 welfare decreases in all policy scenarios.
Greatest welfare losses result from carbon tariffs.
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Model results – Welfare
Global welfare increases in all policy scenarios.
Greatest global welfare gains for full A1 ETS extension.
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Model results – Welfare
ETS extensions yields greater or comparable welfare
improvements than implementing carbon tariffs.
However, each policy trajectory has different welfare
determinants:
Extending ETS coverage generates welfare improvements
primarily by equalizing marginal-abatement costs and the
associated gains from trade in emissions permits.
Implementing carbon tariffs on EIT imports generates welfare
improvements through increases in domestic production and
terms-of-trade effects.
⇒ Policy trajectories yield different sectoral impacts.
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Model results – EIT Output
Greatest EIT output changes due to carbon tariffs.
A1’s EIT output is greater in full ETS than in hybrid ones; vice
versa for NA1.
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Model results – Carbon price
ETS expansion decreases carbon prices in most regions.
Carbon tariffs have only a marginal effects on carbon prices.
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Model results – Carbon leakage
Policy scenarios have little effect on carbon leakage.
Carbon tariffs mostly affect competitiveness channel through shifts
in EIT production; most leakage due to changes in fossil-fuel prices.
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Model results – Upshot
Full ETS extension increases A1’s, NA1’s, and global welfare
more than implementing carbon tariffs.
Major impacts of ETS extensions are mediated through
influence on carbon prices.
Major impacts of carbon tariffs are mediated through changes
in EIT trade and output.
There is only a small effect of either policy on carbon leakage.
Q: How robust are the welfare results?
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Sensitivity analysis
The results above hold for specific parameter values only.
The welfare effects of A1 ETS expansions are influenced by
Differences in marginal-abatement costs,
Magnitude of emissions-reduction,
Emissions-reduction split between ETS and non-ETS sectors.
The welfare effects of carbon tariffs are influenced by
Tariff level,
Carbon price and the calculation of carbon content,
Assumptions governing trade and fossil-fuel supply responses.
Important for either policy’s effects are:
Coalition size of emissions-abating countries,
Temporal evolution of economic activity and emissions.
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Sensitivity analysis
Relative A1 welfare benefits of full A1 ETS extension are
robust with respect to:
Laxer and more stringent sectoral ETS regulation;
Smaller and greater A1 emissions-reduction targets;
Domestic and full accounting of embodied emissions;
Changes in trade substitution and fossil-fuel supply elasticities;
Different reference ETS reference scenarios (reg-full,
int-hybrid).
Changes in A1 preference ordering can occur for:
Change in coalition size;
Change in year of implementation.
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Sensitivity analysis – Coalition size
Withdrawal of Canada, Japan, and the USA does not change the
coalition’s preference for ETS extension.
Withdrawal of RUS, and joint withdrawal of USA, RUS, JPN, CAN
(A1s) reverses preference ordering for all policy trajectories.
⇒ Small coalitions prefer carbon tariffs over ETS extensions.
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Sensitivity analysis – Target year
A1 welfare preferences largely preserved in 2010, reversed in 2020.
Prime reason is increase in MACs over time → reduces potential
ETS efficiency gains and increases carbon-tariff base.
⇒ ETS extension is preferred as early action.
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Conclusions
Subglobal climate policies will be the norm for some years.
This study compared two policy trajectories for improving the
efficiency of subglobal emissions regulation:
Confrontational trajectory: A1 imposes carbon tariffs on EIT
imports from NA1.
Cooperative trajectory: A1 extends sectoral ETS coverage and
pursues ETS linking across A1.
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Conclusions
Core result: A1 ETS extensions yield comparable welfare
improvements for A1 as implementing carbon tariffs, and greater
improvements for NA1 and globally.
A1 preferences in more detail:
Full ETS extensions are preferred over BCAs in most scenarios.
Partial ETS extensions are often preferred less than BCAs.
Early implementation and large coalitions favor ETS
extensions, whereas late implementation and small coalitions
favor BCAs.
Caveats:
The CGE model and model scenarios are highly idealized and
abstract from economic, legal, political, and regulatory detail.
For example, considerable efforts would be necessary to
overcome current barriers to ETS linking and harmonize
ETS-design issues, such as sectoral coverage and inclusion of
cost-containing measures.
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Outlook
Current UNFCCC negotiations envision collaborative action:
The Durban Platform (COP-17, 2011) is tasked to develop a
global universal legal climate agreement by 2015, to be
implemented by 2020.
This, together with emerging NA1 climate policies, would
make imposing carbon tariffs obsolete.
⇒ More sustainable option: support the UNFCCC process and
focus on internal efficiency improvements.
EU Commission’s policy vision of a linked OECD carbon
market within this decade moves in that direction.
This study suggests that, in addition to the political appeal,
there exist also an economic rationale for pursuing internal
efficiency improvements over external ones.
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Thank you
Comments and suggestions:
marco.springmann@uni-oldenburg.de
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Back-up slides
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Model framework
Energy-economic model:
CGE model based on GTAP7inGAMS (Rutherford, 2010);
Extended by explicit representation of energy sector and carbon
market (Rutherford and Paltsev, 2000; Böhringer et al., 2011).
Assumes optimizing behaviour of economics agents
1
2
Consumers maximize welfare subject to budget constraints;
Producers combine intermediate inputs and primary factors at
least cost to produce output.
Consumption and production of goods is represented by nested CES
demand and production functions;
Goods are differentiated by country of origin (Armington approach)
Elasticites and data on sectoral production, trade flows, tax levels,
and CO2 emissions are adopted from the GTAP 7.1 database
(Narayanan and Walmsley, 2008) and from Böhringer et al. (2011).
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Model framework
Base year: 2004
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Model framework
Production of goods is represented by nested constant
elasticity of substitution (CES) production functions;
Elasticities of substitution are adopted from GTAP 7.1 and
Böhringer et al. (2011).
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Model scenarios
ETS scenarios:
all scenarios: cost-effectiveness analysis with global emissions
target: BAU NA1 emissions, 20% emissions reduction in A1.
reg-hybrid-ets: hybrid, non-linked ETS in each A1 region;
sectoral ETS coverage: ELE, OIL, EIT; 5% reduction target
for non-ETS sectors; ETS scales endogenously by region.
reg-full-ets: economy-wide, non-linked ETS in each A1 region.
int-hybrid-ets: A1 ETS are linked with each other, but have
partial sectoral coverage.
int-full-ets: A1 ETS are linked with each other, economy-wide
coverage.
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Model scenarios
Policy trajectories:
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Model results – EIT
Energy-intensive (EIT) sectors:
EIT sectors are affected differently in Annex I countries than
in non-Annex I countries.
In A1, EIT sectors are regulated within Annex I countries’
emissions-trading systems;
In NA1, EIT sectors are subjected to carbon tariffs imposed by
Annex I countries.
However, each policy will, in general, affect both regions
through spillover effects.
As domestic EIT production decreases in Annex I countries,
more EIT products are imported from non-Annex I countries.
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Model results – EIT Exports
Carbon tariffs are trade-depressing globally and for NA1.
A1’s EIT exports increase in all scenarios, but most in the
carbon-tariff one; more in sectoral than in regional expansion.
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Model results – Carbon price
Carbon prices:
Carbon prices correspond to the marginal-abatement costs of
the sectors included in the ETS (EIT, ELE, OIL in the hybrid
ETS, all sectors in the full ETS)
⇒ Carbon prices affect output of ETS sectors (see before).
Carbon prices indicate allocative efficiency: extending ETS
coverage across sectors and regions equalizes MACs.
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Model results – Carbon leakage
Carbon leakage:
Denotes an increase in NA1 emissions as a result of a decrease
in A1 emissions.
Two major channels:
Competitiveness channel: A1’s EIT industries loose market
share to NA1; emissions increase in NA1 due to increased EIT
production.
Fossil-fuel channel: A1’s emissions abatement decreases
demand for fossil fuels → decrease in world prices → increase
fossil-fuel demand and emissions in NA1.
Carbon tariffs predominantly affect the competitiveness
channel through shifts in EIT production.
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Sensitivity analysis – Hybridization and emissions reduction
Too stringent and too lax ETS regulation yield greater relative
benefits of ETS extension over implementing carbon tariffs.
Greater emissions-reduction targets enable greater efficiency gains
from ETS extension.
Sectoral ETS expansion becomes more beneficial than BCAs.
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Sensitivity analysis – Tariff base and elasticities
Higher tariff levels increase relative benefits of BCAs; using
domestic emissions intensities increases benefits of ETS extension.
Leakage-increasing changes in elasticities (e-Arm x 2, e-Oil /2)
increase relative benefits of ETS extension.
Relative preference for ETS extension is largely preserved.
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Sensitivity analysis – Coalition size
Some Annex I countries may not participate in ETS extensions:
USA has not ratified the Kyoto Protocol.
Canada, Russia, and Japan have announced in 2010 that they
would not take on further Kyoto targets.
Canada has formally withdrawn from the Kyoto Protocol in
2011.
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Sensitivity analysis – Coalition size
Withdrawal of Canada and Japan does not change the coalition’s
preference for ETS extension.
Withdrawal of RUS, and joint withdrawal of USA, RUS, JPN, CAN
(A1s) reverses preference ordering for all policy trajectories.
⇒ Small coalitions prefer carbon tariffs over ETS extensions.
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Sensitivity analysis – Target year
Forward projections from 2004 to 2010 and 2020:
based on projections from the US DOE International Energy
Outlook (IEO) 2009 (GDP, CO2, PCRU)
follows three steps:
(1) labor and capital endowments are scaled by GDP growth
rates; resource supplies are scaled by projected increases in
energy demand; and fossil-fuel prices are set at their projected
2010 and 2020 levels
(2) fossil-fuel inputs are scaled by AEEI (ratio of changes in
energy consumption to GDP); final AEEI values are adjusted
iteratively to match the projected CO2 emission levels by
sector and region
(3) fossil-fuel supply functions are recalibrated to assure
consistency of responses to changes in energy prices with the
resource value shares and substitution elasticities adapted to
the projected baseline
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Sensitivity analysis – Target year
A1 welfare preferences largely preserved in 2010, reversed in 2020.
Prime reason is increase in MACs over time → reduces potential
ETS efficiency gains and increases carbon-tariff base.
⇒ ETS extension is preferred as early action.
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Sensitivity analysis – Tariff base
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Sensitivity analysis – Elasticities
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Sensitivity analysis – Hybridization and emissions reduction
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Sensitivity analysis – Coalition size
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements
Sensitivity analysis – Target year
Marco Springmann
A look inwards: Carbon tariffs vs. ETS improvements