Carbon adjustment in a consumption-based emission inventory accounting: a CGE analysis and implications for a developing country

Abstract

Because ‘border carbon adjustment (BCA)’ may violate the presently operational National Emission Inventory (NEI) accounting practised under the United Nations Framework Convention on Climate Change (UNFCCC) which is based on territorial production–based emission reduction responsibility approach, this study intends to investigate the implications of BCA imposition on the exports from a developing country under a territorial consumption-based alternative framework. With this alternative framework of accounting, the study assumes the BCA-burdened developing country to implement ‘domestic carbon adjustment (DCA)’ measures and experiments by applying a static ‘computable general equilibrium (CGE)’ modelling. The result from this study indicates that the closer the rates of BCA and the DCA, the more effective the carbon adjustment schemes are to reduce the emission intensity of energy use. The stricter carbon adjustment measures also found changing the energy consumption pattern of productive sectors by inducing the emission-intensive sectors to switch towards low-emission intensive natural gas. The study recommends the implementation of DCA measures for a developing country as stricter as compared to the foreign standards in a consumption-based framework to make the carbon adjustment initiatives more effective.

Appendices

Appendix 1. Production functions

Tier-I processing: coal and oil composite (FUELi)

$$ {QFUEL}_c={\alpha}_c^1{\left\{{\delta}_c^1{QCOAL}_c^{-{\rho}_c^1}+\left(1-{\delta}_c^1\right){QPOIL}_c^{-{\rho}_c^1}\right\}}^{-\frac{1}{\rho_c^1}} $$

(9)

where

QFUEL :

quantity of ‘coal-oil composite’ commodity

QCOAL, :

quantities of ‘coal and coal products’

QPOIL :

quantity of ‘oil and oil products’

${\alpha}_c^1$, ${\delta}_c^1,{\rho}_c^1$:

CES function (1) scale and share parameter and the exponent, respectively.

Tier-II processing: fossil fuel composite (FOSSILi)

$$ {QFOSSIL}_c={\alpha}_c^2{\left\{{\delta}_c^2{QFUEL}_c^{-{\rho}_c^2}+\left(1-{\delta}_c^2\right){QNGAS}_c^{-{\rho}_c^2}\right\}}^{-\frac{1}{\rho_c^2}} $$

(10)

where

QFOSSIL :

quantity of ‘fossil fuel aggregate’ commodity

QNGAS :

quantities of natural gas.

${\alpha}_c^2$, ${\delta}_c^2,{\rho}_c^2$:

CES function (2) scale and share parameter and the exponent, respectively.

Tier-III processing: energy composite (ENERGYi)

$$ {QENERGY}_c={\alpha}_c^3{\left\{{\delta}_c^3{QFOSSIL}_c^{-{\rho}_c^3}+\left(1-{\delta}_c^3\right).{\left({\lambda}_{ELEC}{QELEC}_c\right)}^{-{\rho}_c^3}\right\}}^{-\frac{1}{\rho_c^3}} $$

(11)

where

QENERGY :

quantity of ‘energy composite’ commodity

QELEC :

quantities of ‘electricity’

${\alpha}_c^3$, ${\delta}_c^3,{\rho}_c^3$:

CES function (3) scale and share parameter and the exponent, respectively.

Tier-IV processing: value-added composite (VAi)

$$ {QVA}_c={\alpha}_c^4{\left\{{\delta}_c^4{LD}_c^{-{\rho}_c^4}+\left(1-{\delta}_c^4\right){KD}_c^{-{\rho}_c^4}\right\}}^{-\frac{1}{\rho_c^4}} $$

(12)

where

QVA :

production of ‘value added composite’ commodity

LD, KD :

input demands for ‘labour’ and ‘capital’, respectively

${\alpha}_c^4$, ${\delta}_c^4,{\rho}_c^4$:

CES function (4) scale and share parameter and the exponent, respectively.

Tier-V processing: value-added and energy composite (QVAENi)

$$ { QVA EN}_c={\alpha}_c^5{\left\{{\delta}_c^5{\left({QVA}_C\right)}^{-{\rho}_c^5}+\left(1-{\delta}_c^5\right){QENERGY}_c^{-{\rho}_c^5}\right\}}^{-\frac{1}{\rho_c^5}} $$

(13)

where

QVAEN :

quantity of ‘value-added energy composite’ commodity

${\alpha}_c^5$, ${\delta}_c^5,{\rho}_c^5$:

CES function (5) scale and share parameter and the exponent, respectively.

Tier-VI processing: intermediate input aggregate (INTi)

Input demand functions

$$ {QINT}_{CINT}^c={\mathit{\operatorname{int}}}_{CINT}^c{ QINT A}_C $$

(14)

where

QINTA :

quantity of intermediate aggregate

QINT:

quantity of intermediate inputs

${\mathit{\operatorname{int}}}_{CINT}^c$ :

Leontief coefficients (input CINT per unit of aggregate intermediate)

Tier-VII processing: final output (Xi)

Input demand functions

$$ {QVAEN}_c={ivaen}_c{QX}_C $$

(15)

$$ {QINTA}_c={inta}_c{QX}_c $$

(16)

where

QX :

quantity of final output

ivaen :

Leontief coefficients for the QVAEN in the final output production

inta:

Leontief coefficients for the QINTA in the final output production

Appendix 2. Simulations

Foreign countries imposing the BCA on Indian export. With BCA imposition Indian exporters receiving lower prices for their commodities.

$$ {PEX}_c\left(1+\frac{\left({bca}_c{EMINT}_c\right)}{PX_c}\right)={\overline{PWEX}}_c. EXR $$

(17)

where

PEX :

supply price of Indian export

$\overline{PWEX}$ :

exogenous world price of Indian export

EXR :

exchange rate

bca :

border carbon adjustment

India imposing the RBCA on its import. With RBCA imposition the tax burden is shared between Indian consumers and the foreign importers.

$$ {PIM}_c\left(1-\frac{\left({rbca}_c{emm}_c\right)}{PWIM_c}\right)={PWIM}_c. EXR $$

(18)

where

PIM :

domestic price of Indian import

PWIM:

endogenous world price of Indian import

rbca :

retaliatory border carbon adjustment

Under DCA measure, India imposing a PCA on Indian production of final output. With PCA imposition the cost function for the final output processing will change.

$$ {PX}_c\left(1-\frac{\left({pca}_c{EMINT}_c\right)}{PX_c}\right)=\frac{QVAEN_c{PVAEN}_c+{QINTA}_c{PINTA}_c}{QX_c} $$

(19)

where

QX, PX :

quantity and price of final output

QVAEN:

quantity of ‘value-added and energy composite’ commodity

PVAEN:

price of ‘value-added and energy composite’ commodity

QINTA :

quantity of intermediate aggregate

PINTA :

price of intermediate input aggregate

pca :

production carbon adjustment