Allowance allocation matters in China's carbon emissions trading system

China's national carbon emissions trading system (ETS) initially started by covering the power generation sector with a rate-based allocation of emission allowances. This single-sector ETS scheme is a tradable performance standard and loosens the participants' emission abatement effort. Given the stringent emission reduction targets implied by China's Nationally Determined Contributions (NDCs) and the expectation that ETS will cover more sectors in the future, we simulate a national ETS of ten carbon-intensive sectors with mass-based, output-based allocation (OBA) of emission allowances. We uncover the impacts and mechanisms of this ETS by comparing the sectoral abatement behaviors across policy scenarios with varying allocation schemes and numbers of benchmarks. We evaluate if the simulated ETS meets important efficiency principles and exhibits desired features. The results show that this ETS achieves China's NDCs with modest macroeconomic losses. The mass-based OBA leads to evenly distributed emission reduction efforts for all ETS participating sectors. It also limits the emission trading volumes and results in slight to modest impacts on sectoral output, especially for the upstream sectors. OBA with fewer benchmarks enhances emission abatement efforts with the caveats of relatively cleaner participants being subsidized by the ETS and slightly higher impacts on the macroeconomy.     

Firm performance and employment in the EU emissions trading scheme: An empirical assessment for Germany

This paper empirically investigates the role of the EU Emissions Trading Scheme (EU ETS) for firm performance and employment in Germany. We provide an overview of relative allowance allocation within the EU ETS as well as an econometric analysis for a large sample of German firms covered by the scheme in order to assess the impacts of EU emissions regulation on both firm revenues and employment. The dataset indicates that the EU ETS was in an overall long position in 2005, although allowance allocation was very heterogeneous across member states. Our econometric analysis suggests that, within the first phase of the EU ETS, relative allowance allocation did not have a significant impact on firm performance and employment of regulated German firms.     

Environmental and wider implications of political impediments to environmental tax reform

The most common notion of environmental tax reform (ETR) is the use of the revenue from environmental taxes to reduce distortionary labour taxes. The PETRAS project¹ has shown that there are a number of social and political impediments to implementing such reform. This paper firstly outlines some of the environmental and economic implications of environmental taxes generally. It goes on to explore three broad approaches to ETR, based on the allocation of the tax revenues, and explores the environmental and economic implications of each approach and the likelihood of political and social acceptance. Particular attention is paid to reducing regressive impacts and impacts on competitiveness. It is concluded that some combination of earmarking a proportion of revenues to environmental projects and diverting rest to reduce labour taxes is probably the best approach in light of the results of the project. The balance should depend upon local labour market and macroeconomic conditions, the extent to which environmental projects are already funded and the extent of government failure, i.e., the problems of resource allocation that occur as a result of government intervention in markets. Funding should only be provided to environmental projects if it can be shown that, in themselves, they are economically efficient. In addition, it is most important that a proportion of the funds be used to ameliorate any regressive impacts. It is also important to bear in mind that hypothecation or recycling of revenue is not the same as a tax shift, which is a reform of the entire system, so some of these approaches may take away from the integrity of ETR. The paper concludes with some of the initiatives that are likely to be necessary to facilitate social and political acceptance of this approach to ETR.     

Can an emission trading scheme promote the withdrawal of outdated capacity in energy-intensive sectors? A case study on China's iron and steel industry

Outdated capacity and substantial potential for energy conservation are the two main features of energy-intensive sectors in developing countries. Such countries also seek to implement market-based options to further control domestic carbon emissions as well as to promote the withdrawal of outdated capacity and upgrade production level. This paper presents a quantitative assessment of the emission trading scheme (ETS) for China's iron and steel industry. The diverse array of normal and outdated capacities was modeled in a two-country, three-good partial equilibrium model. Simulation results show that the abatement potential can be underestimated if the energy-saving effects that result from emission abatement are not considered. In the scenario analysis, we demonstrated that the free allocation of allowances can cause a competitiveness distortion among domestic normal and outdated capacities. Given the government's intention to promote outdated capacity withdrawal and production-level upgrading, an output-based allocation approach is strongly suggested for China's iron and steel sector.     

Economic analysis of the climate pledges of the Copenhagen Accord for the EU and other major countries

This article uses the world GEM-E3 computable general equilibrium model to assess the economic consequences of the climate ‘Copenhagen Accord’. The model allows analyzing the macroeconomic costs in terms of GDP, the change in employment, as well as the impacts on production of specific energy-intensive sectors. Various 2020 climate scenarios are evaluated depending on the GHG mitigation pledges. We find that the cost for the developed countries is around 0.5% of GDP in 2020 for the more ambitious pledges, whereas the GDP effects are more heterogeneous across developing countries and Russia, reflecting the different pledges and the assumptions in the reference scenario across these countries. Further, the article explores whether there is a form of double dividend in the EU when the revenues from auctioning or taxation of GHG emissions are used to reduce the social security contributions of employees. We conclude that GDP and employment perform better compared to the free allocation of permits when more sectors are subject to auctioning or GHG taxes and the additional government revenues are used to reduce the cost of labour.     

Designing an emissions trading scheme for China with a dynamic computable general equilibrium model

To fulfill its Copenhagen pledges to control carbon emissions and mitigate climate change, China plans to establish a nationwide emissions trading scheme (ETS) in 2016. This paper develops a multi-sector dynamic computable general equilibrium model with an ETS module to study the appropriate ETS policy design, including a carbon cap, permit allocation and supplementary policies (e.g., penalty policies and subsidy policies). The main results are as follows. (1) To achieve China's Copenhagen pledge, the equilibrium nationwide carbon price is observed to be between 36 and 40 RMB yuan per metric ton. (2) The ETS policy has a cost-effective mitigation effect by improving China's production and energy structures with relatively little economic harm. (3) Various ETS sub-policies should be carefully designed to balance economic growth and carbon mitigation. In particular, the carbon cap should be set according to China's Copenhagen pledge. A relatively large distribution ratio of free permits, the output-based grandfathering rule for free permits, a penalty price (on illegitimate emissions) slightly above the carbon price, and a sufficient subsidy (from ETS revenue) are strongly recommended in the early stages to avoid significant economic loss. These designs can be adjusted in later stages to enhance the mitigation effect.     

Allocation of CO2 emission permits—Economic incentives for emission reductions in developing countries

The economic impacts on developing regions following a global cap and trade system for carbon dioxide are assessed through the use of an energy-economy systems model. Both an equal per capita allocation and a contraction and convergence allocation with convergence of the per capita emissions by 2050 are shown to offer economic incentive for Africa, India and probably also Latin America to accept binding emissions commitments under a 450 ppm carbon dioxide stabilization scenario. The gain for Latin America is mainly a result of increased export revenues from sales of bio-fuels as a result of the climate policy. It is, on the other hand, unlikely that these allocation approaches would offer an economic incentive for China to join the regime because of its high economic growth, present higher per capita emissions than India and Africa, and more costly mitigation options than Latin America. A more stringent allocation for developing countries such as contraction with convergence of the per capita emissions by the end of this century is estimated to generate reduced net gains or increased net losses for the developing regions (though Africa is still expected to gain).     

Emission intensity in New Zealand manufacturing and the short-run impacts of emissions pricing

This paper reports the greenhouse gas (GHG) emission intensity of the New Zealand (NZ) manufacturing sector at a combination of industry group and class levels (sub-sectors). The short-run impacts of a price on emissions are investigated with a focus on exporting activities. Sub-sectors that could be materially impacted by an expected range of emissions prices accounted for slightly over 9% of national gross domestic product. It is found that there is much variability of emission intensity within manufacturing and even within sub-sectors. An assessment of trade intensities further indicates that several emissions-intensive activities are also export-intensive. These activities are at most risk of losing competitiveness in the short-run if they are subjected to a price on GHG emissions that their competitors in other countries are not. Emissions reduction policies must take account of trade competitiveness imperatives if NZ is to meet its international GHG emissions target while maintaining manufacturing sector competitiveness.     

Implications of CO2 reduction policies for a high carbon emitting economy

This paper uses a dynamic computable general equilibrium model to compare the macroeconomic and sectoral impacts of three environmental policies in Australia — an emissions trading scheme (ETS), an ETS combined with technological innovation in the renewable energy sector and a fuel tax as an alternative to the ETS. Overall, the impacts of the ETS were not significantly adverse. Although the fuel tax had similar impacts to the ETS on key macro-variables such as real GDP, employment, household consumption, exports and imports, it was however not effective compared to the latter in reducing emissions. Neither policy led to inflation growth of more than 0.8% for any coal mining and non-mining Australian state. At the sectoral level, the GDP growth of energy-intensive industries such as coal, iron ore, steel and coal-powered electricity generators is adversely affected while electricity generators who use gas and renewable energy sources and the forestry sector gain. It was also found that a 10% technological change in the renewable energy sector over a decade did not significantly improve the outcome when coupled with the ETS. Thus the Australian government's industry assistance to invest in low pollution technologies needs to be more aggressive to meet current and future international emission abatement targets.     

Design and implementation of carbon cap and dividend policies

An important concept in discussions of carbon management policies is cap and dividend, where some fraction of the revenues of an auction on emission allowances is returned to citizens on an equal per capita basis. This policy tool has some important features; it emphasizes the fact that the atmosphere is a common property resource, and it is a highly transparent measure that can be effectively used to protect the income of low-income individuals. In this paper we examine this policy in the California context, and focus on the costs and impacts of a cap and dividend scheme when applied to carbon emissions associated with electricity, natural gas and transportation services. We find that cap and dividend can effectively be used to address the economic impacts of carbon management policies, making them progressive for the lowest-income members of society. We find that the majority of households receive positive net benefits from the policy even with the government retaining half of the auction revenue. If auction revenues are instead dedicated only to low-income households, the majority of low-income households can be fully compensated even with the state government retaining upwards of 90% of auction revenues for other purposes.     

Emissions trading and investment decisions in the power sector—a case study in Finland

Organizations, which consider investment in or divestment of power production licences/capacity within the European Community, are exposed to the impacts of the European Union Emission allowance Trading Scheme (EU ETS). In this paper, the consequences of the EU ETS on investment decisions are explored in a country-specific setting in Finland. First, we review the general mechanisms through which the EU ETS influences size, timing and cashflows of an investment. Next, we discuss the projected changes in Finnish power producers’ investment environment and examine the financial impacts due to the EU ETS on a case investment decision, a hypothetical condensing power plant (250 MW_e). The standard discounted cash flow (DCF) analysis is extended to take into account the value of two real options: the option to wait and the option to alter operating scale. In a quantitative investment appraisal, the impact of emissions trading not only depends on the expected level of allowance prices, but also on their volatility and correlation with electricity and fuel prices. The case study shows that the uncertainty regarding the allocation of emission allowances is critical in a quantitative investment appraisal of fossil fuel-fired power plants.     

Ownership and environmental regulation: Evidence from the European electricity industry

The paper investigates how ownership affects the environmental performance in developed countries where environmental regulation is introduced in the form of market-based instrument. By looking at a cross-country panel dataset of 29 power markets around Europe over the period 1990–2012, we find empirical evidence that an increase of public ownership, as measured by the OECD ETCR index, is associated with a reduction of both greenhouse gas emissions and carbon intensity. We also find that the implementation of the European Emissions Trading Scheme (ETS) had a limited impact on emissions' reduction due to lax allocation of allowances. The positive effect of public ownership on environmental performance has been significant even after the introduction of the ETS, giving additional incentives to mitigate emissions when the ETS cap was not stringent enough. This evidence suggests that government control over power companies in Europe can has created idiosyncratic incentives to improve environmental quality, complementing environmental regulation in the achievement of environmental goals when the latter was absent or sub-optimal.     

“Investments and public finance in a green,low carbon,economy”

The paper evaluates the impacts on investments and public finance of a transition to a green, low carbon, economy induced by carbon taxation. Four global tax scenarios are examined using the integrated assessment model WITCH. Taxes are levied on all greenhouse gases (GHGs) and lead to global GHG concentrations equal to 680, 560, 500 and 460 ppm CO₂-eq in 2100. Investments in the power sector increase with respect to the Reference scenario only with the two highest taxes. Investments in energy-related R&D increase in all tax scenarios, but they are a small fraction of GDP. Investments in oil upstream decline in all scenarios. As a result, total investments decline with respect to the Reference scenario. Carbon tax revenues are high in absolute terms and as share of GDP. With high carbon taxes, tax revenues follow a “carbon Laffer” curve. The model assumes that tax revenues are flawlessly recycled lump-sum into the economy. In all scenarios, the power sector becomes a net recipient of subsidies to support the absorption of GHGs. In some regions, with high carbon taxes, subsidies to GHG removal are higher than tax revenues at the end of the century.     

Potential impact of (CET) carbon emissions trading on China’s power sector: A perspective from different allowance allocation options

In Copenhagen climate conference China government promised that China would cut down carbon intensity 40–45% from 2005 by 2020. CET (carbon emissions trading) is an effective tool to reduce emissions. But because CET is not fully implemented in China up to now, how to design it and its potential impact are unknown to us. This paper studies the potential impact of introduction of CET on China’s power sector and discusses the impact of different allocation options of allowances. Agent-based modeling is one appealing new methodology that has the potential to overcome some shortcomings of traditional methods. We establish an agent-based model, CETICEM (CET Introduced China Electricity Market), of introduction of CET to China. In CETICEM, six types of agents and two markets are modeled. We find that: (1) CET internalizes environment cost; increases the average electricity price by 12%; and transfers carbon price volatility to the electricity market, increasing electricity price volatility by 4%. (2) CET influences the relative cost of different power generation technologies through the carbon price, significantly increasing the proportion of environmentally friendly technologies; expensive solar power generation in particular develops significantly, with final proportion increasing by 14%. (3) Emission-based allocation brings about both higher electricity and carbon prices than by output-based allocation which encourages producers to be environmentally friendly. Therefore, output-based allocation would be more conducive to reducing emissions in the Chinese power sector.     

Optimal taxation of a monopolistic extractor: Are subsidies necessary?

This note reconsiders the optimal taxation problem when extraction of an exhaustible resource is monopolistic. In a standard model, I explicitly characterize and examine all the efficiency-inducing paths of taxes/subsidies on the resource. Consistently with the literature, there is a family of such optimal paths. In contrast with Im (2002), it may not be necessary to subsidize the monopoly at any date: within the family of optimal paths of taxes/subsidies, there may exist some paths along which the regulator raises positive revenues at all dates. This illustrates how the static trade-off between inducing efficiency and raising tax revenues in the presence of market power is relaxed under exhaustibility.     

Life cycle assessment of flax shives derived second generation ethanol fueled automobiles in Spain

Biofuel use seems to have certain environmental, energy and socioeconomic advantages versus fossil fuel consumption. The substitution of fossil fuels with biofuels can be a useful tool to fulfil the Spanish and European policy in relation to mitigation of greenhouse gas (GHG) emissions and increase the security in energy supply. The continuous increase in energy consumption, dependence on energy and high petroleum prices has motivated increasing support for renewable energy promotion. In Spain (the third ethanol producer in Europe in 2007), ethanol from lignocellulosic feedstocks could be one of the most valuable and interesting possibilities for renewable transportation fuels due to the limited competition with food production and high net reduction of GHG emissions. This study is focused on flax shives, obtained as an agricultural co-product from flax crops dedicated to fibre production for specialty paper pulp manufacture as lignocellulosic biomass to produce second generation ethanol involving the use of cellulosic technology. The life cycle assessment (LCA) methodology was used to evaluate the environmental impacts of the production and use in a flexi fuel vehicle (FFV) of ethanol blends (10 and 85% in volume of ethanol with gasoline) versus conventional gasoline, throughout their whole life cycle in order to highlight the main sources of these impacts. The system boundaries include cultivation, extraction, processing and final use of fuels. Mass and economic allocation were considered to determine the effect on the results of different allocation approaches.The results of the study show that the allocation methods are essential for outcomes and decision-making. Using ethanol as transportation fuel could present better environmental performance than conventional gasoline in terms of global warming and fossil fuel consumption according to mass allocation. However, environmental credits could be achieved in terms of acidification, fossil fuel consumption and human toxicity according to economic allocation. Contributions to other impact categories such as eutrophication and photochemical oxidants formation were lower for conventional gasoline regardless of the allocation procedure selected. Agricultural activities related to feedstock production are notable contributors to the environmental performance. Thus, high yielding varieties, reduction of tillage activities and reduction in fertilization should help to reduce these impacts.     

Can a carbon permit system reduce Spanish unemployment?

This paper analyses the impact of carbon policy on unemployment in Spain and whether recycling the public revenues earned from permit auctions can alleviate this problem. While Spain's deviation from the European Union's intermediate emission goals is more serious than most other member countries' unemployment in Spain is also well above average for the European Union. We use a computable general equilibrium model that includes unemployment in the markets for unskilled and skilled labour. We find that introducing carbon permits does not aggravate Spanish unemployment. In fact, if supplied with revenue recycling schemes, unemployment rates may actually fall. Contrary to other European studies, we find that the best option is to reduce payroll taxes on relatively skilled types of labour. This reform is successful in both increasing labour demand and dampening the supply response to rising wages. However, while all of the recycling schemes generate dividends in terms of aggregate welfare, none entirely offsets the abatement costs.     

CO2 emissions of global metal-industries: The case of copper

Copper is, due to its divergent properties, a popular metal. Nevertheless, from the ecological point of view, processing of copper has some drawbacks. For example, copper ores contain elements, like sulphur, which could be damaging. Recently, global copper-demand increased, mainly due to rising Chinese imports. In the longer-term, the environmental impacts could intensify as an increase in demand for copper products is expected, so enforcing growing mining and processing activities. However, at least two trends can counteract these developments: technical progress and increased use of recycled metal. The objective of this study is to discuss whether the trends will enforce a sustainable development of the copper material flow, focusing on carbon-dioxide emissions and sulphur. The study is made by using a process-based partial equilibrium model, modelling the global copper material flow, considering recycling of copper as well as by-products. The allocation of output and technology to regions is based on economic decisions subject to the constraints set by existing techniques. By discussing the longer-run development of the global copper material flow, one scenario will be computed.     

Alternative U.S. biofuel mandates and global GHG emissions: The role of land use change,crop management and yield growth

We investigate the impacts of the U.S. renewable fuel standard (RFS2) and several alternative biofuel policy designs on global GHG emissions from land use change and agriculture over the 2010–2030 horizon. Analysis of the scenarios relies on GLOBIOM, a global, multi-sectoral economic model based on a detailed representation of land use. Our results reveal that RFS2 would substantially increase the portion of agricultural land needed for biofuel feedstock production. U.S. exports of most agricultural products would decrease as long as the biofuel target would increase leading to higher land conversion and nitrogen use globally. In fact, higher levels of the mandate mean lower net emissions within the U.S. but when the emissions from the rest of the world are considered, the US biofuel policy results in almost no change on GHG emissions for the RFS2 level and higher global GHG emissions for higher levels of the mandate or higher share of conventional corn-ethanol in the mandate. Finally, we show that if the projected crop productivity would be lower globally, the imbalance between domestic U.S. GHG savings and additional GHG emissions in the rest of the world would increase, thus deteriorating the net global impact of U.S. biofuel policies.     

Optimal green tax reforms yielding double dividend

In an stylized endogenous growth economy with a negative externality created by CO2 emissions and in which abatement activities are made by private firms, we find a wide range of dynamically feasible green tax reforms yielding the double dividend without any need to assume a complex production structure or tax system, or a variety of externalities in production. As a remarkable finding, we obtain certain scenarios in which increasing the emissions tax up to the Pigouvian level and removing completely the income tax is dynamically feasible and, also, it is the second-best reform. Hence, as a difference to previous literature, in these scenarios the first-best tax mix is implementable, allowing for the elimination of both environmental and non-environmental inefficiencies. Our result arises because of the consideration of public debt issuing and the management of the government budget balance with an intertemporal perspective. The result is obtained for an intermediate range of environmental bearing in preferences, the valid range being contingent on the pre-existing income tax rate. The type of tax reform that we propose could also be implemented for different energy taxes.