The Economic and Energy Effects of Carbon Dioxide Emissions Trading in the International Market: New Challenge Conventional Measurement

Abstract

Starting from the planned linkage of the European Union’s Emissions Trading System with a new system in Australia in 2015, this paper simulates the impacts of expanding this international emissions market to include China and the USA, which are respectively the largest and second largest carbon dioxide emitters in the world. The findings suggest that including China and the USA significantly impacts the price and the quantity of permits traded worldwide. When China joins the EU-Australia-New Zealand (EU-ANZ)-linked market, we find that the prevailing global carbon market price falls significantly, from $35/tCO₂ to $11.4/tCO₂. In contrast, adding the USA to the EU-ANZ market increases the price to $48/tCO₂. If both China and the USA join the linked market, the market price of an emissions permit is $18.1/tCO₂ and 610 million metric tons are traded, compared to 95 million metric tons in the EU-ANZ scenario. When permit trading between all countries is considered, relative to when all carbon markets operate in isolation, renewable energy in China expands by more than 22 % and shrinks by 50 and 95 % in the USA and ANZ, respectively. In all scenarios, global emissions are reduced by around 5 % relative to a case without climate policies. Such results may attract the attention of the policy makers as well as the stakeholders for future investment in energy and environmental technology.

Appendices

Appendix A

Fig. 7

Simplified structure of a CGE model

Appendix B. Equations

Import Price

$$ P{M}_c=pw{m}_c\left(1+t{m}_c\right)EXR + {\displaystyle {\sum}_{c\prime \in CT}P{Q}_{c\prime }ic{m}_{c\prime\ c}} $$

(1)

where

c ∈ C :

a set of commodities (also referred to as c. and C.)

c ∈ CM(⊂C):

a set of imported commodities

c ∈ CT(⊂C):

a set of domestic trade inputs (distribution commodities)

PM _c :

import price in LCU (local-currency units) including transaction costs

pwm _c :

c.i.f. import price in FCU (foreign-currency units)

tm _c :

import tariff rate

EXR :

exchange rate (LCU per FCU)

PW _c :

composite commodity price (including sales tax and transaction costs)

icm _{c ' c} :

quantity of commodity c. as trade input per imported unit of c.

Exporte Price

$$ P{E}_c=pw{e}_c\left(1-t{e}_c\right)EXR-{\displaystyle {\sum}_{c\prime \in CT}P{Q}_{c\prime }ic{e}_{c\prime\ c}} $$

(2)

where

c ∈ CM(⊂C):

a set of exported commodities (with domestic production)

PE _c :

export price (LCU)

pwe _c :

f.o.b. export price (FCU)

te _c :

export tax rate

ice _c ' c :

quantity of commodity c. as trade input per exported unit of c.

Demand Price of Domestic Non trated Goods

$$ PD{D}_c=PD{S}_c+{\displaystyle {\sum}_{c\prime \in CT}P{Q}_{c\prime }ic{d}_{c\prime\ c}} $$

(3)

where

c ∈ CM(⊂C):

a set of commodities with domestic sales of domestic output

PDD _c :

demand price for commodity produced and sold domestically

PDS _c :

supply price for commodity produced and sold domestically

icd _c ' c :

quantity of commodity c. as trade input per unit of c produced and sold domestically

Absorption

$$ P{Q}_c=\left(1-t{q}_c\right)\ P{Q}_c=PD{D}_c\ Q{D}_c + P{M}_{c\ }Q{M}_c $$

(4)

where

QQ _c :

quantity of goods supplied to domestic market (composite supply)

QD _c :

quantity sold domestically of domestic output

QM _c :

quantity of imports of commodity

tq _c :

rate of sales tax (as share of composite price inclusive of sales tax)

Marketed Output Value

$$ P{X}_c\ Q{X}_c=PD{S}_c\ Q{D}_c + P{E}_{c\ }Q{E}_c $$

(5)

where

PX _c :

aggregate producer price for commodity

QX _c :

aggregate marketed quantity of domestic output of commodity

QE _c :

quantity of exports

c ∈ CX(⊂C):

a set of commodities with domestic output

Activity Price

$$ P{A}_a={\displaystyle {\sum}_{c\in C}PXA{C}_{a\ c}{\theta}_{a\ c}} $$

(6)

where

a ∈ A :

a set of activities

PA _a :

activity price (gross revenue per activity unit)

PXAC _ac :

producer price of commodity c for activity a

θ _a c :

yield of output c per unit of activity a

Aggregate Intermediate Input Price

$$ PINT{A}_a={\displaystyle {\sum}_{c\in C}P{Q}_cic{a}_{c\ a}} $$

(7)

where

PINTA _α :

aggregate intermediate input price for activity a

ica _c a :

quantity of c per unit of aggregate intermediate input a

Activity Revenue and Costs

$$ P{A}_a=\left(1-t{a}_a\right)\ Q{A}_a=PV{A}_a\ QV{A}_a + PINT{A}_a\ QINT{A}_a $$

(8)

where

ta _a :

tax rate for activity

QA _a :

quantity (level) of activity

QVA _a :

quantity of (aggregate) value-added

QINTA _a :

quantity of aggregate intermediate input

PVA _a :

price of (aggregate) value-added

Consumer Price Index

$$ \overline{CPI} = {\displaystyle {\sum}_{c\in C}P{Q}_ccwt{s}_c} $$

(9)

where

cwts _c :

weight of commodity c in the consumer price index

$\overline{CPI}$ :

consumer price index (exogenous variable)

Producer Price Index for Nontrated Market Output

$$ DPI = {\displaystyle \sum_{c\in C}}PD{S}_cdwt{s}_c $$

(10)

where

dwts _c :

weight of commodity c in the producer price index

DPI :

producer price index for domestically marketed output

CES Technology: Activity Production Function

$$ Q{A}_a={\alpha}_a^a{\left({\delta}_a^a\ QV{A}_a^{-{\rho}_a^a}+\left(1 - {\delta}_a^a\right)\ QINT{A}_a^{-{\rho}_a^a}\right)}^{\frac{1}{\rho_a^a}} $$

(11)

CES Technology: Value-Added-Intermediate-Input Ratio

$$ \frac{QV{A}_a}{QINT{A}_a}={\left(\frac{QINT{A}_a}{QV{A}_a}\ \frac{\delta_a^a\ }{1-{\delta}_a^a\ }\right)}^{\frac{1}{1+{\rho}_a^a}} $$

(12)

where

a ∈ ACES(⊂A):

a set of activities with a CES function at the top of the technology nest

α ^a _a :

efficiency parameter in the CES activity function

δ ^a _a :

CES activity function share parameter

ρ ^a _a :

CES activity function exponent

Value-Added and Factor Demands

$$ QV{A}_a={\alpha}_a^{va}{\left({\displaystyle {\sum}_{f\in F}{\delta}_{f\ a}^{v\ a}\ Q{F}_{f\ a}^{-{\rho}_a^{v\ a}}}\right)}^{\frac{1}{\rho_a^{v\ a}}} $$

(13)

Factor demand

$$ \begin{array}{l}W{F}_{f\ }{\overline{WFDIST}}_{f\ a}=\\ {}PV{A}_a\ \left(1-tv{a}_a\right) = QV{A}_a{\left({\displaystyle \sum_{f\in F}}{\delta}_{f\ a}^{v\ a}\ Q{F}_{f\ a}^{-{\rho}_a^{v\ a}}\right)}^{-1}\ {\delta}_{f\ a}^{v\ a}\ Q{F}_{f\ a}^{-{\rho}_a^{v\ a-1}}\end{array} $$

(14)

where

f ∈ F(=F ′):

a set of factors

tva _α :

rate of value-added tax for activity a

α ^a _a :

efficiency parameter in the CES value-added function

δ ^v a _f a :

CES value-added function share parameter for factor f in activity a

QF _fa :

quantity demanded of factor f from activity a

ρ ^v a _a :

CES value-added function exponent

WF _f :

average price of factor

${\overline{WFDIST}}_{fa}$ :

wage distortion factor for factor f in activity a (exogenous variable)

Disaggregated Intermediate Input Demand

$$ QIN{T}_{c\ a}=ic{a}_{c\ a}\ QINT{A}_a $$

(15)

where

QINT _{c a} :

quantity of commodity c as intermediate input to activity a

Commodity Production and Allocation

$$ QXA{C}_{a\ c}+{\displaystyle {\sum}_{h\in H}QH{A}_{a\ c\ h}=}{\theta}_{a\ c}\ Q{A}_a $$

(16)

where

QXAC _{a c} :

marketed output quantity of commodity c from activity a

QHA _{a c h} :

quantity of household home consumption of commodity c from activity a for household h

Output Aggregation Function

$$ Q{X}_c={\alpha}_c^{ac}{\left({\displaystyle {\sum}_{a\in A}{\delta}_{ac}^{ac}\ QXA{C}_{ac}^{-{\rho}_c^{ac}}}\right)}^{-\frac{1}{\rho_c^{ca}-1}} $$

(17)

where

α ^ac _c :

shift parameter for domestic commodity aggregation function

δ ^ac _ac :

share parameter for domestic commodity aggregation function

ρ ^ca _c :

domestic commodity aggregation function exponent

First-Order Condition for Output Aggregation Function

$$ PXA{C}_{a\ c}=P{X}_c\ Q{X}_c{\left({\displaystyle {\sum}_{a\in A\prime }{\delta}_{a\ c}^{ac}\ QXA{C}_{a\ c}^{-{\rho}_c^{ac}}}\right)}^{-1}\ {\delta}_{a\ c}^{ac}\ QXA{C}_{a\ c}^{-{\rho}_c^{ac}-1} $$

(18)

Output Transformation (CET) Function

$$ Q{X}_c={\alpha}_c^t{\left({\displaystyle {\sum}_{a\in A}{\delta}_c^t\ Q{E}_c^{\rho_c^t} + \left(1-{\delta}_c^t\right)\ Q{E}_c^{\rho_c^t}}\right)}^{\frac{1}{\rho_c^t}} $$

(19)

where

α ^t _c :

a CET function shift parameter

δ ^t _c :

a CET function share parameter

ρ ^t _c :

a CET function exponent

Export-Domestic Supply Ratio

$$ \frac{Q{E}_c}{Q{D}_c}={\left(\frac{P{E}_c}{PD{S}_c}\ \frac{1-{\delta}_c^t\ }{\delta_c^t\ }\right)}^{\frac{1}{\rho_{c-1}^t}} $$

(20)

Import-Domestic Demand Ratio

$$ \frac{Q{M}_c}{Q{D}_c}={\left(\frac{PD{D}_c}{P{M}_c}\ \frac{\delta_c^q\ }{1-{\delta}_c^q\ }\right)}^{\frac{1}{1+{\rho}_c^q}} $$

(21)

Demand for Transactions Services

$$ Q{T}_c={\displaystyle {\sum}_{c\prime \in C\prime }{\displaystyle \sum \left(ic{m}_{c\ c\prime\ }Q{M}_{c\prime } + ic{e}_{c\ c\prime\ }Q{E}_{c\ c\prime } + ic{d}_{c\ c\prime\ }Q{D}_{c\prime\ }\right.}} $$

(22)

where

QT _c :

quantity of commodity demanded as transactions service input

Household Consumption Spending on Marketed Commodities

$$ P{Q}_c\ Q{H}_{c\ h}=P{Q}_c\ {\gamma}_{c\ h}^m+{\beta}_{c\ h}^m\left(E{H}_h-{\displaystyle \sum_{c\hbox{'}\in C}}P{Q}_c{\gamma}_{c\hbox{'}\ h}^m\ {\displaystyle \sum_{a\in A}}{\displaystyle \sum_{c\hbox{'}\in C}}\ PXA{C}_{a\ c\hbox{'}}{\gamma}_{a\ c\hbox{'}\ h}^h\right. $$

(23)

where

QH _{c h} :

quantity of consumption of marketed commodity c for household h

γ ^m _c h :

subsistence consumption of marketed commodity c for household h

γ ^h _{a c ' h} :

subsistence consumption of home commodity c from activity a for household h

β ^m _c h :

marginal share of consumption spending on marketed commodity c for household h

Factor Markets

$$ {\displaystyle {\sum}_{a\in A}Q{F}_{f\ a}=}{\overline{QFS}}_f $$

(24)

where

${\overline{QFS}}_f$ :

quantity supplied of factor (exogenous variable)

Composite Commodity Markets

$$ Q{Q}_c={\displaystyle \sum_{a\in A}}QIN{T}_{c\ a} + {\displaystyle \sum_{a\in A}}Q{H}_{c\ h} + Q{G}_c+QIN{V}_c+qds{t}_c+Q{T}_c $$

(25)

where

qdst _c :

quantity of stock change

Direct institutional Tax Rates

$$ TIN{S}_i={\overline{tins}}_i\ \left(1+\overline{TINSADJ}\ tin s{01}_i\right)+{\overline{DTINS}}_i\ tin{s}_i $$

(26)

where

TINS  _i :

rate of direct tax on domestic institutions i

${\overline{tins}}_i$ :

exogenous direct tax rate for domestic institution i

$\overline{TINSADJ}$ :

direct tax scaling factor (=0 for base; exogenous variable)

tins01 _i :

0.1 parameter with 1 for institutions with potentially flexed direct tax rates

${\overline{DTINS}}_i$ :

change in domestic institution tax share (=0 for base, exogenous variable)

Institutional Savings Rates

$$ MP{S}_i={\overline{mps}}_i\ \left(1+\overline{MPSADJ}\ mps{01}_i\right)+ DMPS\ mps{01}_i $$

(27)

where

${\overline{mps}}_i$ :

base savings rate for domestic institution i

$\overline{MPSADJ}$ :

savings rate scaling factor (=0 for base)

mps01 _i :

0–1 parameter with 1 for institutions with potentially flexed direct tax rates

DMPS :

change in domestic institution savings rates (=0 for base, exogenous variable)

Total Absorption

$$ TABS={\displaystyle {\sum}_{h\in H}{\displaystyle {\sum}_{c\in C}P{Q}_{c\kern0.5em }Q{H}_c\kern0.5em +{\displaystyle {\sum}_{a\in A}{\displaystyle {\sum}_{c\in C}{\displaystyle {\sum}_{h\in H}PXA{C}_{a\ c\kern0.5em }QH{A}_{a\ c\ h} + }{\displaystyle {\sum}_{c\in C}P{Q}_{c\kern0.5em }Q{G}_c + }}{\displaystyle {\sum}_{c\in C}P{Q}_{c\kern0.5em }QIN{V}_c\kern0.5em +}}}{\displaystyle {\sum}_{c\in C}P{Q}_{c\kern0.5em }qds{t}_c}} $$

(28)

where

TABS :

total nominal absorption

Ratio of Investment to Absorption

$$ INVSHR. TABS={\displaystyle {\sum}_{c\in C}P{Q}_{c\kern0.5em }QIN{V}_c\kern0.5em +}{\displaystyle {\sum}_{c\in C}P{Q}_{c\kern0.5em }qds{t}_c} $$

(29)