19 th International Input-Output Conference 1 4 June 2011 Hiroaki Shirakawa

Can Consumer Responsibility Help Address Carbon Leakage Concerns? An Analysis of Participation vs. Non-Participation in a Global Mitigation Regime

19th International Input-Output Conference

14 June 2011

Hiroaki Shirakawa

Graduate School of Environmental Studies, Nagoya University, Japan

In collaboration with

Xin Zhou

Institute for Global Environmental Strategies, Japan

Motivations The division of parties into participation and non-

participation by the Kyoto Protocol creates differences in the strictness of domestic climate policies, which cause the concerns of carbon leakage and international competitiveness.

Closely related to carbon leakage is embodied emissions, which refers to CO2 emitted from each upstream stage of the supply chain of a product and transferred indirectly to the final product.

Many studies indicated that a significant portion of emissions emitted from developing countries is embodied in their exports which consumed in rich nations.

Current national GHG inventories account for “territorial emissions”, which do not take account of trade and embodied emissions.

Addressing consumption-based responsibility may help account for embodied emissions and address carbon leakage.

Purpose

To take account of embodied emissions and examine how consumer responsibility will influence carbon leakage and international competitiveness associated with trade by applying linear programming to a multi-region input-output (MRIO) model.

Analytical Framework 1

Applying the Leontief substitution type of LP analysis to a MRIO model to analyse the substitutions between domestic production, imports and exports in order to achieve the optimal national welfare under the constraints of technologies, emission levels and given consumption levels.

Establishing a two-country MRIO model, which can (i) model imports and exports of both intermediates and final products systematically; (ii) identify the origin sector of imports and the destination sector of exports; and (iii) easily account for embodied emissions.

Country r and s represent a participation and a non-participation country in a mitigation regime. Each country has the same n industries and each industry produces one goods. In each country, there is a given level of consumption. Each industry sells in both countries to meet the intermediate demand of industries and the final demand of households. The same industry located in two countries competes with each other in both home and foreign markets. Two countries trade with each other but not with other countries.

Analytical Framework 2 Equilibrium between supply, demand and

bilateral trade

Introducing Leontief technical coefficient matrices A and self-sufficiency matrices S.

Define fixed ratio of value added.

sssrsssrs

rsrrrsrrr

FFXXX

FFXXX

ssrrsssrrrs

ssrrsssrrrr

FSFSXASXASX

FSFSXASXASX

)1()1(

)1()1(

sssss

rrrrr

XXAX

XXAX

Analytical Framework 3 Constrains on production capacity

Non-perfect substitution of like products produced domestically and imported from overseas

National emissions based on territorial emissions

ss

rr

PCX

PCX

ssrs

rrsr

FF

FF

)(

)(sssrsssrrsss

rsrrrsrrrrrr

FFXXQXQNQ

FFXXQXQNQ

Analytical Framework 4 National emissions based on consumer

responsibility

Emission limits based on territorial and consumer responsibility

or

Inclusion of domestic abatement and emissions trading

or

)()(

)()(sssssrsrsrs

srsrsrrrrrr

FXQFXQRQ

FXQFXQRQ

ss

rr

CAPNQ

CAPNQ

ss

rr

CAPRQ

CAPRQ

ssrss

rrsrr

CAPERERRNQ

CAPERERRNQ

)(

)(

Analytical Framework 5

National welfare is defined as profits minus abatement costs plus emissions trading revenue.

Solve a linear programming model by maximising the national welfare under the constrains of all above equations.

ssrss

rrsrr

CAPERERRRQ

CAPERERRRQ

)(

)(

)(

)(2

2

srsssss

rsrrrrr

ERERcpRcXW

ERERcpRcXW

Scenarios

RuleBase

scenario S1 S2 S3 S4

Territorial responsibility r, s r, s r, s

Consumer responsibility r, s r, s

Emission cap r r, s r r, s

Emissions trading system

Numerical simulation results 1 Maximization for Country r

Item Base scenario S1 S2 S3 S4X1_r 410 358 410 410 410X1_s 214 263 214 214 214X2_r 660 660 660 660 660X2_s 291 283 291 291 291V_r 519 503 519 519 519V_s 231 247 231 231 231E_r 207 160 147 146 146E_s 138 107 78 77 77R_r 3.3 0.4 0.6 0.4R_s 0 0.0ER_r 19 0.6ER_s 0 0.4Q_r 387 368 387 368 368Q_s 210 220 210 228 228Q 597 588 596 596 596W_r 519 502 517 519 519W_s 231 247 233 231 231W 750 748 750 750 750

Numerical simulation results 2 Maximization for Country s

Item Base scenario S1 S2 S3 S4X1_r 316 316 316 316 316X1_s 330 330 330 330 330X2_r 514 514 514 514 514X2_s 430 430 430 430 430V_r 403 403 403 403 403V_s 347 347 347 347 347E_r 44 44 44 44 411E_s 91 91 91 91 458R_r 5.8 5.2 14.5 5.2R_s 0.7 0.7ER_r 0.7 61.2ER_s 0.0 0.0Q_r 300 294 295 310 356Q_s 314 314 313 290 253Q 614 608 608 600 608W_r 403 398 399 371 391W_s 347 347 347 347 355W 750 745 746 718 746

Sensitivity analysis 1 Influence of an increase in carbon price by 100%

Item S2/r S4/r S2/s S4/s

R_r 100% 100% -1% -100%

R_s 0% 0% 100% 100%

ER_r 13% 0% 102% 1%

ER_s 1,445% 100% 10,304% 0%

W_r 0% 0% 0% -1%

W_s 1% 0% 0% 2%

W 0% 0% 0% 1%

An increase in the carbon price will mainly influence domestic abatement efforts (R) and potential trade in emission credits (ER) sensitively.

Sensitivity analysis 2 Influence of an increase in unit abatement costs by 100% in

Country r

Item S1/r S2/r S3/r S4/rX1_r 2% 0% 0% 0%X1_s -2% 0% 0% 0%V_s 1% 0% 0% 0%E_r 3% 0% 0% 0%E_s 1% 0% 0% 0%R_r -50% -50% 0% -50%ER_r 0% 1% 0% 123%Q 1% 0% 0% 0%W_r 1% 0% 0% 0%W_s 0% 0% 0% 0%W 0% 0% 0% 0%

An increase in r’s unit abatement costs will weaken its domestic reduction efforts and buy more emission credits because of relatively lower carbon price compared with domestic unit abatement costs.

Sensitivity analysis 3 Influence of an increase in unit abatement costs by 100% in

Country s

Item S2/s S4/s

R_s -50% -50%

ER_r -50% -1%

An increase in s’ unit abatement costs will also weaken its domestic abatement efforts and at the same time influence r’s demand for purchasing emission credits negatively.

Sensitivity analysis 4 Influence of tightened emission cap by 20% in Country r

Item S1/r S2/r S3/r S4/rX1_r -12% 0% -23% 0%X1_s 25% 0% 54% 0%X2_r -22% 0% -21% 0%X2_s 52% 0% 44% 0%V_r -20% 0% -21% 0%V_s 41% 0% 48% 0%E_r -66% 0% -67% 0%E_s 21% 0% 17% 0%R_r 75% 0% 4,808% 0%ER_r 0% 396% 0% 4,886%ER_s 0% 0% 0% -100%Q_r -19% 0% -12% 0%Q_s 43% 0% 26% 0%Q 4% 0% 3% 0%W_r -21% -2% -47% -2%W_s 41% 4% 48% 4%W 0% 0% -18% 0%

A tightened emission cap in r will influence its production, exports, international competitiveness and national welfare negatively, while at the same time it will be greatly beneficial to the non-participation country s.

Sensitivity analysis 4 Influence of tightened emission cap by 20% in Country s

Item S2/s S4/s

ER_r -91% -100%

ER_s Very large Very large

W_r 2% 2%

W_s -2% -2%

A tightened emission cap in the non-participation country will slightly impact its national welfare and at the same time benefit the participation country. In addition, it will greatly decrease r’s demand in purchasing emission credits.

Conclusions 1

Without full participation of parties in a global mitigation regime, the participation country will be impacted negatively on its international competitiveness, exports and national welfare, while the non-participating country, taking the advantage of free-riding, will be a winner in a globalised economy linked with trade.

A change from territorial responsibility to consumer responsibility in national inventory accounting system may have potential impacts on the imports, exports and domestic reductions in the participation country, but not necessarily to address the carbon leakage concern.

Conclusions 2

In a global mitigation regime without full participation, a cap-and-trade system between participation and non-participation can greatly help alleviate the competitive disadvantages of the participation country.

Domestic abatement efforts and the emissions trading market will be influenced by carbon price and unit abatement costs sensitively.

For future research, an empirical study with the two-country MRIO of Japan and China will be conducted. In addition, we can consider to solve simultaneous equations of the reaction functions of two countries using Game Theory.

Thank you for your attention!

Contact:

Xin Zhou at [email protected];

Hiroaki Shirakawa at [email protected]