Ruslana Palatnik 1

Can Climate Change Mitigation Policy Benefit the Israeli Economy? A Computable General Equilibrium Analysis

Ruslana Palatnik

Mordechai Shechter

Ruslana Palatnik 2

Outline

Introduction Model Data Results

Simulation 1 Simulation 2 Simulation 3

Future development Current research at FEEM

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Global warming process

Global Warming Rachel Palatnik 3

CO2, CH4, N2O, CFCs, etc.

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Why Climate Change Mitigation?

A worldwide issue of concern Globally coordinated action UNFCCC – UN Framework Convention on

Climate Change:1. Created in 1992 and ratified by Israeli government2. Objective of stabilizing atmospheric GHG concentration3. The Kyoto protocol (1997)

- set emission limits on GHGs globally averaged by 6-7% relative to 1990 level by 2008-2012

Post Kyoto agreement

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The aims of the study: Build a static CGE model for the Israeli economy,

with detailed analysis of energy flows Answer the following research questions:

1. In what range would a carbon energy tax need to lie in order to meet the Israeli Kyoto target for energy-related emissions of CO2 (7% reduction)?

2. What would be the impact of such a carbon tax on the Israeli economy, welfare and emissions?

3. How would this carbon tax affect sectoral output, household consumption patterns and demand for the various energy commodities?

4. Perform sensitivity analysis5. Check for double/employment dividend hypothesis.

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The aims of the study (Continued):

Two different schemes for recycling of the revenue of the carbon tax to be compared:

1. Proportional tax reduction

2. Reduction of the labor tax rate

Carbon emission trading market to be analyzed and compared to carbon taxes on the welfare maximization basis

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Type of Model: Computable General Equilibrium (CGE) Computable: type of numerical simulation

model– changes are introduced→ the resulting changes in

GDP, welfare, output, employment… are calculated. General Equilibrium: supply = demand in all

markets simultaneously– all intermediate demands are taken into account, and

effects that they have on other sectors are included. Differs from traditional “partial equilibrium”

analysis where price and quantity adjustments reach equilibrium in an isolated market. Ignoring connections with other markets → a wider range of effects are modeled.

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Related Literature

Single country CGE for carbon mitigation policy analysis: Böhringer and Rutherford (1997); Wissema and Dellink (2006); André et. al (2003); Bovenberg et. al (2003); Dissou et al. (2002)…

Multiple country CGE for carbon trade: Whalley and Wigle (1991); Viguier (2004); GTAP, GTAP-E, ORANI models…

Israel: Haim et al. (2007) ; Kan et al. (2007) ; Yehoshua and Shechter (2003); Kadishi, et al. (2005); Avnimelech, Y. et al. (2000) ; Gressel et al. (2000) …- partial equilibrium analysis.

Conclusion: CGE model for Israeli economy needed to analyze effects of economic incentives for GHGs emission mitigation

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Research structureDeveloping a Static CGE ModelConstructing the Benchmark (SAM)Simulation 1: exogenous labour and capital

supply; Carbon tax / auctionable permits recycled through proportional reduction of existing taxes.

Simulation 2: sensitivity analysis.

Simulation 3: endogenous labour supply; Carbon tax / auctionable permits recycled through labour tax.

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General model of the economy

Labor, capital and consumption taxes

Producers Consumers

Government

I/O matrix EnergyTechnology

Rest of the World

Intermediate Goods

indirect and environmental taxes

Supply of public goods

transfers

Supply of capital, labor

Supply of commoditiesIm

portNet transfers

Export Import

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The Model: General Features

Market clearing in: all markets goods and services production factors

Zero excess profitsBalanced budget for each agent

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The Model: Nesting Structure of the Production Function

Production: nested production structure using CES family of functions.

Y

M KLES:0

ELEC FOS

S:0.1

COAL OIL

S:0.5

CRUDE REFINED

S:0

L KES:0.85

K E

S:0.65

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Functional Form in Household Sector

Household Welfaremax U = Cobb-Douglas (CD1 ,…, CD18)s.t. Income constrain

18

18

1

18

1

max

s.t. (1 ) * *

(1 ) * (1 ) *

ii

i

i i en en eni en

j jj

U CD

pd tc CD pd ta CD pinvHouSav

tl pl L tk pk K TRN

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Functional Form in International Trade

International trade

Ai = CET(Di, EDi; σ=4)

Ai = CES(Mi, Σj {Y j,i}; σ=4)

11 1

1

1 1

,

1

1

( 1) /

i i i i i

i i i i j ij

A D ED

A M Y

where

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Functional Forms in Government Consumption, Export and Investment

GovernmentmaxG = Leontief(GD1 ,…,

GD18)

s.t. budget constraint

ExportE = Leontief (ED1 ,…,

ED18)

s.t. Balance of payment=net import+ total net transfers abroad

InvestmentI = Cobb-Douglas(ID1 ,…,

ID18)

s.t. Total investment+ stock change= Total savings

18

18

1

max

. . *

i

ii

i i i ii

I ID

s t pinv ID pa SD HouSav GovSur BoPdef

18

1

max min

. . {(1 ) - * * }

i

i

i i i ii

EDE

s t tm M pfx px ED BoPdef

18 18

,1 1

18 18

,1 1 ,

max min

. . * ( * ) * *

( * ) ( * ) ( * ) ( * )

* ;

i

i

j j j i j j jj i

i i i en en j en eni i en j i

ii

GDG

s t ty Y tid IO tl L tk K

tc CD tm M ta IO ta CD

pg GD TPS GovSur where en i

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Market clearing conditions Domestic Demand Di = Σj {IOi,j} + CDi + GDi + INVDi + SDi

Armington Aggregate Supply

IMi + Σj {Y j,i} = Ai = Di + EDi

Primary Factors

Σj Lj = LS; determines pl

Σj Kj = KS (fixed); determines pk

Ensuring closed financial cycle:p g b

p g b

S S S Inv StCh

S Inv StCh S S

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The Model: Taxation

1. Indirect taxes less subsidies on products;2. Taxes less subsidies on production;3. Labor taxes;4. Capital taxes;5. Taxes on households;6. Taxes on imports;7. A counter-factual carbon energy tax or

tradable permits

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Activities(j)Commodities

(i)Primary

income (L,K)HouseholdsGovernmentROWInvest

ment Total

Activities (j)Domestic

Supply

Activity income (Gross

Output)

Commodities (i)

Intermediate Demand

Final Household

consumption

Final government consumption

Exports (f.o.b)

Investment

Total Demand

Factor Inputs

Factor income

Households (RA)

Factor income to households

Inter-households

transfers

Transfers to households

Transfers to households from ROW

RA income

Government (G)

Producer taxes TY(j)

Sales taxes, tariffs, export

taxes

Direct taxes

Transfers to government from ROW

G income

ROWImports

Net Capital transfers to

ROW

Government transfers to

ROW

Foreign exchange outflow

Savings Private savings

Government savings

Foreign savings

Savings

TotalActivity expendituresSupply

Factor expenditures

Households expenditures

Government expenditures

Foreign exchange

inflow

Investment

Social Accounting Matrix (SAM) Structure

Value-added[L(j), K(j)]

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Sectoral mapping 1. AFF Agriculture2. ROIL Refined petroleum3. COIL Extraction of crude petroleum and natural gas4. COAL Mining and agglomeration of hard coal5. MNF Manufacturing6. ELE Electricity7. WAT Water8. CON Construction9. TRD Wholesale and retail trade repairs of vehicles10. ASR Accommodation services and restaurants11. TRC Transport storage and communications12. BIF Banking insurance and other financial institutions13. BAC Real estate renting and business activities14. PAD Public administration15. EDU Education16. HWS Health services and welfare and social work17. CSS Community social personal and other services18. IBS Imputed bank services and general expenses

From 162-industry aggregation tables

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Data: Macro Social Accounting Matrix (1995 in Million NIS)

 ActivitiesCommoditiesFactorsHouseholdsGovernmentSavingsRest of World

Total

Activities 497,798.2     497,798.2

Commodities248,866.5  162,396.080,019.070,863.

081,938.0644,082.5

Factors239,339.2      239,339.2

Households  157,878.8 51,856.0 53,463.4263,198.2

Government9,591.939,540.873,908.437,230.0  6,500.0166,771.1

Savings   58,462.0-1,913.0 14,314.070,863.0

Rest of World 106,743.77,552.05,110.436,809.0  156,215.1

Total497,797.6644,082.8239,339.2263,198.4166,771.070,863.0156,215.4 

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Data: Relative contribution of CO2 emissions by sector due to fuel combustion and electricity consumption in Israel in 1995 (Source: Avnimelech , 2002)

SectorCO2 emission from

fuel combustion

CO2 emission from electricity

consumption

Total CO2

emissions

 In ktonsIn %In ktonsIn %In % of total

emissions

In ktonsIn %

 (I)**(I/sumI)(II)(II/sumII)(II/sumI)(I+II)***(I+II)/

       /sumI)

Electricity production

26,56953.47%1,5155.70%3.05%1,5153.05%

Manufacture10,99922.13%7,70529.00%15.50%18,70437.64%

Transport10,35420.84% 0.00%0.00%10,35420.84%

Residential and

commercial

1,8263.67%14,77255.60%29.73%16,54433.29%

Agriculture  2,5779.70%5.19%2,5775.19%

Total (sum)49,694100.00%26,569100.00%53.47%49,694100.00%

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Data: Fuel consumption and CO2 emissions by sectors. Source: Avnimelech (2002)

SectorElectricity production

ManufactureTransportResidential and commercial

 Fuel cons'

(1000 tons)CO2 (1000

tons)Fuel cons'

(1000 tons)CO2 (1000

tons)Fuel cons'

(1000 tons)CO2 (1000

tons)Fuel cons'

(1000 tons)

CO2

(1000 tons)

LPG 124366 4041,194

Gasoline  2,1596,657 

Diesel Oil1374359002,8591,0132,876199632

Naphtha 769   

Residual Fuel Oil2,0316,2522,2777,099  

Petrol. Coke  168675  

Tar  267821 

Coal8,19019,882   

Total CO2

emissions26,56910,99910,3541,826

% of total emission 53.47% 22.13% 20.84% 3.67%

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Simulation 1: The Sectoral Impacts of Carbon Taxes on the Israeli Economy

Carbon Tax ($, 1995)Agricult'

Refined OIL

Crude OILCOALManuf'Electric'WaterTransp'

Rest ofEcon'

Changes in Gross-of-Tax Commodity Prices (percent)

16⅔-0.914.551.0825.04-0.015.541.610.10-0.09

33⅓-1.038.921.3949.63-0.069.702.120.21-0.18

50-1.0913.341.7674.27-0.1713.592.550.27-0.28

66 ⅔-1.1517.782.1498.92-0.2717.272.940.33-0.37

Changes in Final Consumption by Commodity (percent)

16⅔-0.53-6.04-4.84-13.70-0.50-4.96-1.31-0.87-0.15

33⅓-1.04-10.24-9.31-24.18-0.98-8.52-2.10-1.73-0.30

50-1.29-13.83-12.43-32.01-1.21-11.41-2.55-2.20-0.33

66 ⅔-1.53-17.14-15.86-38.28-1.43-13.99-2.96-2.65-0.36

Changes in Demand for Coal by Sector (percent)

16⅔-10.55-15.48---10.75-14.36---

33⅓-19.32-25.93---19.35-23.94---

50-25.92-33.86---25.82-31.14---

66 ⅔-31.25-40.25---31.02-36.91---

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Simulation 1: The Sectoral Impacts of Carbon Taxes on the Israeli Economy (continued)

Carbon Tax($)Agricul'

Refined OIL

Crude OILCOALManuf'Electric'WaterTransp'

Rest ofEcon'

Changes in Demand for Petroleum by Sector (percent)

16⅔-2.17-6.21---2.39-6.34-4.30-3.31-1.34

33⅓-5.44-10.46---5.48-10.85-7.07-6.47-2.58

50-8.14-14.10---8.02-14.61-9.30-9.07-3.62

66 ⅔-10.65-17.46---10.35-18.00-11.33-11.49-4.58

Changes in Demand for Electricity by Sector (percent)

16⅔-2.33-6.57---2.75-10.07-4.39-3.32-1.41

33⅓-5.63-11.08---6.03-17.05-7.14-6.45-2.64

50-8.33-14.91---8.69-22.59-9.32-9.01-3.67

66 ⅔-10.81-18.42---11.11-27.28-11.29-11.37-4.60

Changes in Sectoral Activity Levels (percent)

16⅔-0.24-5.45---1.24-6.34-2.71-0.67-0.16

33⅓-0.72-9.79---1.68-10.43-3.78-1.34-0.32

50-0.90-13.52---1.82-13.71-4.42-1.63-0.32

66 ⅔-1.08-16.97---1.95-16.61-5.00-1.91-0.33

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Simulation 1: Sectoral Marginal Abatement Cost Curves for Israel.

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

0 1000 2000 3000 4000 5000 6000 7000 8000

CO2 emission reduced (Kton)

Car

bo

n t

ax (

$ 19

95)

MAC_HouseholdsMAC_Rest of EconomyMAC_ElectricityMAC_ManufactureMAC_Transport

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Simulation 1: Impact of Carbon tax on sectoral emission

Electricity

RA

ManufactureTransport

Refined oilAgricalture

Rest of economy

010

000

2000

030

000

4000

050

000

0 16.67 33.33 50 66.67

Carbon Tax

Car

bon

Emis

sion

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Simulation 1: The Aggregate Economic Impacts of Carbon Taxes

Carbon tax (1995

$)

CO2

Emission (ktons)

CO2

Abatement (ktons)

CO2

Abatement (%)

Welfare Change

from Benchm’

(%)

GDP Change

from Benchm’

(%)

Carbon Tax

Payments Share of GDP (%)

049,748.00-----

16⅔45,158.114,589.899.22%-0.27%-0.31%0.18%

33⅓42,155.297,592.7115,26%-0.54%-0.61%0.33%

5039,804.969,943.0419.99%-0.72%-0.79%0.47%

66⅔37,802.3611,945.6524.01%-0.89%-0.96%0.60%

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Simulation 1: The Sectoral Impacts of Auctionable Permits on Israeli Economy

Changes in Commodity Prices (%)

(%)Changes in Final

Consumption by

Commodity

Changes in Sectoral Activity Levels (%)

Sectoral Emission

Abatement (kton)

Manufacture-0.08-0.21-0.2586.26

Electricity2.16-1.99-2.331678.49

Refined Oil2.04-2.21-2.25123.91

Coal11.5-6.08--

Transport0.05-0.32-0.43510.49

Rest of Econ.-0.04-0.06-0.08782.96

Households---300.26

Permit Price ($, 1995)

CO2 Emissions

(ktons)

CO2

Abatement (ktons)

Welfare Change from Benchmark

(%)

GDP Change from

Benchmark (%)

9.0346,265.63,482.36-0.09%-0.12%

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Simulation 2: Nesting Structure of 3 Production Functions Modeled.

Initial Production Function

(KL)E Nest, Finish elasticities

(van der Werf , 2007)

(KL)E Nest, Italian elasticities

(van der Werf , 2007)

S:0

S:0.5

M

Y

KLE

ELK

L K

Rest nests unchanged

S:0

S:0.5

S:0.5

M

Y

KLE

ELK

L K

Rest nests unchanged

S:0

S:0.25

S:0.5

K

Rest nests unchanged

Y

NE LKE

S:0

L KE

S:0.85

E

S:0.65

M KLE

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Simulation 2: Marginal Abatement Curves of the Israeli Economy for Various Production Function Definitions

0

50

100

150

200

35,000 40,000 45,000 50,000

Total Emission (ktons)

Car

bon

Tax

(N

IS, 1

995)

MAC_AMAC_BMAC_C

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Simulation 2: The Aggregate Economic Impacts of Carbon Taxes and Auctionable Permits via Production Function definition

Production Function AProduction Function BProduction Function C

Carbon taxPermitCarbon taxPermitCarbon taxPermit

($, 1995)16⅔66 ⅔9.0316⅔66 ⅔14.216⅔66 ⅔21

CO2

Emission (ktons)

45,15837,80246,26645,96639,74246,26646,83742,03946,266

CO2

Abatm. (% )

9.23 %24.0 %7 %7.61%20.1%7%5.85 %15.5%7%

Welfare Change

(%)-0.27-0.89-0.09-0.11-0.50-0.10-0.08-0.36-0.11

GDP Change

(%)-0.31-0.96-0.12-0.14-0.57-0.13-0.12-0.49-0.16

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Simulation 3: Economic Impacts of Carbon Tax (Unemployment Case)

Carbon tax

(NIS, 1995)

CO2

Emissions (ktons)

CO2

Abate ment

Welfare Change

from Benchmark

Real GDP Change

from Benchmark

Labour/ Capital

Price Index Change

Un-employment

-49,748.00----6.90%

16⅔46,663.136.2%-0.05%-0.08%0.2%5.96%

33⅓45256.759.0%-0.14%-0.21%0.5%5.32%

5043652.3812.3%-0.24%-0.33%0.7%5.11%

67⅔41765.4416.0%-0.34%-0.45%1.0%5.01%

Permit Price ($

21⅔)46,265.67%-0.08%-0.12%0.3%5.79%

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Simulation 3: Sensitivity of economic indicators to changes of the elasticity of substitution between labour-capital and energy composites: 7% abatement target.

S:LKEPermit Price

($, 1995)

WelfareChangeFrom

Benchmark

Real GDPChange fromBenchmark

Un-employment

034.21-0.30%-0.40%6.09%

0.2521⅔-0.08%-0.12%5.59%

0.5015.57 0.03%0.02%5.39%

0.7511.98 0.04%0.10%5.29%

1.009.46 0.05%0.15%5.19%

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Future Analysis Updated SAM (in 2009 publication for I-O table 2006); Natural gas – energy resource; Check for additional energy tax revenues recycling

schemes; Dynamic CGE model; Sector-specific factors where appropriate (e.g. in

agriculture, energy); Differentiate factors (e.g. skilled versus unskilled labour); Include other greenhouse gases; Introduce imperfect competition in energy sector; Introduce technological change.

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Current Research (FEEM)

ICES: Intertemporal Computable Equilibrium System

World Climate Change adaptation costs and benefits focusing on agricultural sector

Biofuels as Climate Change mitigation policy Water issues

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Castello, 5252 - I-30123 Venezia, - Italy

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