Hacia el Futuro: Energy, Economics, and the Environment in 21 st Century Mexico

Hacia el Futuro: Energy, Economics, and the Environment

in 21st Century Mexico

Maria E. Ibarraran and Roy Boyd

EPA and SMF Workshop

Rio de Janeiro, September 2006

Content of the bookContent of the book

Part IPart I1. Introduction1. Introduction

2. Greenhouse Gas Emissions and Climate 2. Greenhouse Gas Emissions and Climate ChangeChange

3. Forecasting the Impact of Climate 3. Forecasting the Impact of Climate ChangeChange

4. Energy Use in Mexico (and Latin America)4. Energy Use in Mexico (and Latin America)

5. Economic Theory, Emissions Control, and 5. Economic Theory, Emissions Control, and KyotoKyoto

Content (cont) … and Content (cont) … and emphasis of what our model emphasis of what our model

doesdoesPart IIPart II

6. A Dynamic General Equilibrium Model6. A Dynamic General Equilibrium Model

7. Simulation Results Under Competitive 7. Simulation Results Under Competitive ScenariosScenarios

8. Simulation Results Under Imperfect 8. Simulation Results Under Imperfect Market ScenariosMarket Scenarios

9. Simulation Results with Emissions 9. Simulation Results with Emissions TradingTrading

10. Conclusions10. Conclusions

Special features of our workSpecial features of our work

Combines science, economics, and policy-Combines science, economics, and policy-makingmaking Science of climate change and evidenceScience of climate change and evidence Emissions worldwide, in Latin America and in Emissions worldwide, in Latin America and in

Mexico Mexico Regional and local impacts, especially for MexicoRegional and local impacts, especially for Mexico Energy use and trends in Mexico, Brazil, Energy use and trends in Mexico, Brazil,

Argentina and VenezuelaArgentina and Venezuela Economic analysis of climate change and Economic analysis of climate change and

possible solutions through incentivespossible solutions through incentives International agreementsInternational agreements

Table1. Carbon emissions from fossil fuel consumption and flaring, (million metric tons of CO2)

CountryCountry 19801980 19851985 19901990 19951995 20002000 20022002 Percentage Change Percentage Change (1980-2002)(1980-2002)

MexicoMexico 237237 274274 308308 319319 376376 363363 52.952.9

BrazilBrazil 191191 190190 253253 302302 338338 346346 81.681.6

ArgentinaArgentina 9595 9696 104104 122122 135135 120120 26.726.7

VenezuelaVenezuela 9696 9595 110110 123123 133133 143143 54.254.2

ColombiaColombia 4040 4444 4141 5353 5959 5959 48.948.9

ChileChile 2424 2020 3232 4040 5555 5454 125.0125.0

CubaCuba 3232 3535 3636 3030 3333 3434 4.54.5

Pto RicoPto Rico 2828 2222 2020 2424 2727 3535 21.221.2

PeruPeru 2323 2323 2020 2525 2929 2828 22.622.6

Latin American TotalLatin American Total 876876 897897 10411041 11881188 13581358 13681368 56.256.2

World TotalWorld Total 1863618636 1962819628 2163821638 2210722107 2389123891 2453324533 31.631.6

Source: EIA, 2002.

Expected impacts of climate Expected impacts of climate change for Mexicochange for Mexico

Regional ImpactRegional Impact Specific vulnerabilitySpecific vulnerability

AgricultureAgriculture Forest ecosystemsForest ecosystems Desertification and DroughtDesertification and Drought HydrologyHydrology Coastal zonesCoastal zones Human HealthHuman Health

Sea level rise scenarioDrought scenario

Desertification scenario Corn production scenario

Expected effects by 2025-2050

Energy UseEnergy Use

02000400060008000

1000012000

1965 1975 1985 1995 2000 2003

PE

TA

JOU

LE

S

Coal Nuc, hydro, geo, wind Biomass Hydrocarbons

0

5001000

15002000

25003000

35004000

4500

1965 1975 1985 1995 2000 2003

Agriculture Resid, Com, Public Transportation Industrial

Total final energy consumption by sector

Primary energy supply by fuel type

Energy PricesEnergy Prices

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

DOM=EXTERNAL NAT GAS FUEL OIL DIESEL LPG GASOLINE

Relation between domestic prices and opportunity costs or external prices for petroleum

fuels and natural gas (1970-1988)

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

DOM=EXTERNAL COMMERCIAL INDUSTRIAL P UBLIC LIGHT DOMESTIC AGRICULTURE

Comparison of electricity rates between Mexico and U.S. (domestic rate/US rate)

Source: EIA, 2004.

Features of the Dynamic Computable Features of the Dynamic Computable General Equilibrium ModelGeneral Equilibrium Model

The model is calibrated using 2000 data and The model is calibrated using 2000 data and is run for a total of 21 years to 2020. is run for a total of 21 years to 2020.

The model is composed of 9 production The model is composed of 9 production sectors 7 consumption sectors, 4 consuming sectors 7 consumption sectors, 4 consuming agents segregated by income group, a agents segregated by income group, a government sector, and a foreign trade government sector, and a foreign trade sector.sector.

The model solves in such a way that savings The model solves in such a way that savings plus imports are equated with investment plus imports are equated with investment plus exports.plus exports.

Features of the Dynamic Features of the Dynamic Computable General Equilibrium Computable General Equilibrium

Model (cont.)Model (cont.) The model assumes rational The model assumes rational

expectations on the part of all agentsexpectations on the part of all agents Labor and productivity growth are Labor and productivity growth are

consistent with present OECD consistent with present OECD projections (i.e. 1.3% and 1.6%)projections (i.e. 1.3% and 1.6%)

Further Model AssumptionsFurther Model Assumptions

All demand and substitution elasticities used are All demand and substitution elasticities used are based on current empirical estimates and varied in a based on current empirical estimates and varied in a sensitivity analysis.sensitivity analysis.

A flexible nesting structure is used based on a CES A flexible nesting structure is used based on a CES production and consumption structure.production and consumption structure.

The model has special features to all for taxes, The model has special features to all for taxes, tariffs, subsidies, technological change and tariffs, subsidies, technological change and depletion.depletion.

The model is constructed in such a way as to allow The model is constructed in such a way as to allow detailed analysis of the fossil fuel and power sectors.detailed analysis of the fossil fuel and power sectors.

A total of 25 simulations were run assuming a A total of 25 simulations were run assuming a variety of policies and market conditions variety of policies and market conditions

Sectors in the ModelSectors in the ModelProducing Sectors Production Goods

Consumer Goods and Services

1. Manufacturing Manufacturing Goods 1. Food 2. Coal Mining Coal 2. Energy 3. Chemicals and Plastics

Chemicals and Plastics 3. Autos

4. Agriculture Agricultural goods 4. Gasoline 5. Services Producer Services 5. Consumer Transport

6. Transportation Transportation for production

6. Consumer Services

7. Electricity Electricity 7. Housing and Household goods

8. Oil and Gas 1. Crude Petroleum 2. Natural Gas 9. Refining output Refined output

Mathematical Description of Mathematical Description of the Modelthe Model

?L, K, M > 0 and ?L + K + M = 1

1) ]MK+L[ = V1)-/(1)/-(

tM1)/-(

tK1)/-(

tLtt

For each household c total utility is modeled by the function,

(2) Uc = t Uc,t (Xc,t, Rc,t) * (1+ )-t t = 1, …, n

Each consumer’s expenditure co nstraint can be written as,

(3)

n

t 1

(TGc,t + TFc,t + (PL,t * Lc,t) + (r * K t * Sc,t)) =

n

t 1

((INVt * Sc,t) + (PI,t * Xc,t) + (PL,t * Rc,t))

where endowments are given on the left-hand side of the equation and expenditures are placed on the right hand side. TGc,t and TFc,t represent the transfer to the consumer from the government and from the foreign agents, PL,t is the tax exclusive price of labor and r is the rental rate of capital. Kt is the level of capital stock in period t, Sc,t is the share of total capital owned by consumer c, INVt is the total investment in time period t, and PI,t is the tax inclusive vector of prices for consumer goods

(4)

Gu Ax1

1 x2 2 x i

i xn n

i1

i

E 1

APi

i

i1

n

The balance of trade relationship is given by,

(5) (Pm,t * IMj,t ) = (Pj,t * EXj,t ) + TFc,t t = 1, ..., n

where IMj,t is a (nine dimensional) vector representing the quantity of each of the producer goods imported, Pm,t is the vector of imported goods prices, EXj,t is the vector of producer goods exported, Pj,t is the tariff inclusive vector of producer goods prices, and TFc,t is the level of foreign transfers which can be positive, zero, or negative.

More formally, the growth in the effective labor force over time is given by the equation,

(6) Lt+1 = Lt(1+)

where is the composite of the growth rate of population over time and the growth in the effectiveness of the typical worker

The capital growth rate is modeled in accordance with capital theory and is represented by a system of three equations. For each time period t we have,

(7) PA,t = Pk,t+1 t = 1, ..., T

where PA,t is the weighted (aggregate) tax exclusive price of consumption, (i.e. the weighted average of the PI,t’s) and Pk,t+1 is next year’s tax exclusive price of capital. This says that the opportunity cost of acquiring a unit of capital next year is a unit of consumption in the present period. We also have

(8) Pk,t = (1+rt) Pk,t+1 t = 1, ..., T

meaning that the price of capital in this period, Pk,t, must be equal to the coming period’s rental value of capital, rt*Pk,t+1, plus next period price of capital, Pk,t+1. Finally, we have

Following Lau, Puhlke, and Rutherford (1997) we divide the problem into two distinct sub-problems, one defined over the finite period from t = 0 to t = T and the second the infinite period from t = T+1 to T = . Hence, the first problem is

(10) )R ,X( U )+11

( tc,tc,tc,t

T

=0t Max

subject to

(11) SKP SKP + L P = XP 1+TC1+Tc,1+Tk,tCc,00ktctL

T

=0ttctA

T

=0t,,,,,,,

(9) Kt+1 = Kt(1-Δ) + INVt t = 1, …, T

where Δ stands for the rate of depreciation and INV stands for gross investment. This states that the capital stock in the next period must be equal to this year’s capital stock plus net investment. Taken together, equations 7-9 insure that economic growth will be consistent with profit maximizing behavior on the part of investors.

and (11a) R + L = L tc,tc,tc, for all t = 0, 1, ... T

and the second problem is

(12) )R ,X(U )+1

1( tc,tc,ct

t

1+T=t

Max

subject to

(13) SKP + LP = X.P 1+tc,1+Tc,1+TK,tc,tL,1+T=t

tc,tI,1+T=t

,

(13a) R + L = L tc,tc,tc, for all t=T+1, ...?

where ? is the rate of time preferences, ro and Kc,o refer to the rental value of

capital and quantity of capital before the terminal period, rT+1 and K c,T+1 refer

to these variables after the terminal period, and L c,t is total labor plus leisure for each agent in the t th time period. PK,t stands for the tax exclusive price of capital, and , as before, PI,t and PL,t stand for the tax inclusive price of consumer goods and the tax exclusive price of labor respectively.

we include the level of post -terminal capital as a variable and add a constraint on investment growth in the final period. Thus we have

(14) INVT/INVT-1 = YT/YT-1

where YT gives GDP at time T. This constraint imposes a balanced growth in the final period, but does not require that the model achieve steady-state growth.

Perfect CompetitionPerfect Competition

The model is first run under the The model is first run under the assumptions of perfect competition assumptions of perfect competition and full employment to see the impact and full employment to see the impact of various energy policies and of various energy policies and technological change on key economic technological change on key economic variables as well as CO2 emissions.variables as well as CO2 emissions.

A total of 9 different scenarios are run A total of 9 different scenarios are run under these assumptions.under these assumptions.

Scenario 8: Scenario 3 plus a carbon tax and capital-enhancing technological change in all sectors

Scenario 7: Scenario 5 plus a carbon tax


Scenario 5: Scenario 2 plus energy efficient technological change in all sectors

Scenario 4: Scenario 1 plus deregulation of energy prices and capital-enhancing technological change in energy sectors

Scenario 3: Scenario 1 plus new investment in PEMEX and CFE producing capital-enhancing technological change in energy sectors

Scenario 2: Scenario 1 plus deregulation of energy prices

Scenario 1: The benchmark case plus oil depletion

Scenario 0 : The benchmark case

Scenario 8: Scenario 3 plus a carbon tax and capital-enhancing technological change in all sectors




Scenario 4: Scenario 1 plus deregulation of energy prices and capital-enhancing technological change in energy sectors

Scenario 3: Scenario 1 plus new investment in PEMEX and CFE producing capital-enhancing technological change in energy sectors

Scenario 2: Scenario 1 plus deregulation of energy prices

Scenario 1: The benchmark case plus oil depletion

Scenario 0 : The benchmark case

0

2

4

6

8

10

12

14

Sc 0 Sc 1 Sc 2 Sc 3 Sc 4 Sc 5 Sc 6 Sc 7 Sc 8

GDP CO2 Emissions

GDP and CO2 Emissions Under GDP and CO2 Emissions Under the Various Scenarios Runthe Various Scenarios Run

Comparison of Scenarios

Scenario 1 is compared to Scenario 0








Scenario1 Scenario2 Scenario3 Scenario4 Scenario5 Scenario6 Scenario7 Scenario8

GDP -1.81% 0.06% 1.13% 0.92% 1.25% -0.19% 0.97% 18.43%Final level of Investment -11.18% 0.76% 3.75% 2.99% 4.01% -4.32% 0.00% 19.03%Oil output -37.09% -0.21% 31.64% 31.43% -28.30% -14.62% -25.38% 5.87%Power output -2.72% -0.48% 15.64% 15.06% -3.02% -3.78% -12.64% 16.39%Consumption 1.42% -0.05% 0.29% 0.23% 0.39% 0.08% 0.17% 15.46%Imports -0.01% 0.00% 0.01% 0.01% -0.01% -0.01% -0.02% -0.06%Exports -3.65% -0.13% 2.34% 2.21% -2.16% -1.38% -1.73% 6.50%Exports oil -37.13% -0.15% 31.92% 31.77% -28.14% -14.56% -24.85% 1.55%BoP surplus -45.41% -2.82% 51.12% 48.30% -32.65% -20.84% -32.33% 123.72%Cumulated welfare agent 1 -0.34% -0.10% 0.43% 0.33% 0.02% -0.07% -0.14% 12.46%Cumulated welfare agent 2 -0.30% -0.09% 0.43% 0.34% 0.02% -0.07% -0.14% 12.59%Cumulated welfare agent 3 -0.75% -0.06% 0.21% 0.15% 0.03% 0.02% -0.04% 8.69%Cumulated welfare agent 4 -1.02% 0.08% -0.04% 0.04% 0.06% 0.14% 0.10% 4.56%Terminal capital stock -4.37% -0.36% 1.07% 0.71% 1.94% -1.68% 0.46% -0.72%Cumulated Govt. revenue from PEMEX -10.20% 0.32% -4.55% -4.22% 1.02% -4.41% 3.19% -3.19%Cumulated Govt. revenue from CFE 2.33% 0.00% -2.27% -2.27% 6.98% 0.00% 2.33% 20.93%Cum. Govt revenue from other sources 1.29% -0.02% 1.40% 1.38% 0.50% 2.55% -0.30% 44.84%CO2 Emissions -31.98% -0.25% 27.90% 27.75% -27.76% -14.18% -24.69% 9.28%

Important Points From these Important Points From these SimulationsSimulations

Our results make it clear that discussions of Our results make it clear that discussions of energy policy have to recognize the importance of energy policy have to recognize the importance of depletion and investment in the choice of energy depletion and investment in the choice of energy alternatives.alternatives.

For every ton of carbon emissions avoided, GDP For every ton of carbon emissions avoided, GDP declines by about $104 dollars. (note-very much in declines by about $104 dollars. (note-very much in line with other’s results e.g. EPA)line with other’s results e.g. EPA)

This number is fairly high with respect to other This number is fairly high with respect to other developing countries (i.e. China) and reflects the developing countries (i.e. China) and reflects the fact that Mexico has little ability to shift from high fact that Mexico has little ability to shift from high carbon content fuels (such a significant coal carbon content fuels (such a significant coal deposits) to fuels with substantially lower or no deposits) to fuels with substantially lower or no carbon content (such as natural gas, hydroelectric carbon content (such as natural gas, hydroelectric power, or nuclear power. power, or nuclear power.

Important Points (Cont.)Important Points (Cont.)

The results of our simulations show that a carbon tax, The results of our simulations show that a carbon tax, in spite of the significant environment benefits in in spite of the significant environment benefits in terms of stemming carbon dioxide and other harmful terms of stemming carbon dioxide and other harmful emissions, will entail significant costs in terms of both emissions, will entail significant costs in terms of both economic efficiency and consumer equity economic efficiency and consumer equity

The simulations so demonstrate the importance of The simulations so demonstrate the importance of technology for both the energy and non energy technology for both the energy and non energy sectors.sectors.

Our results are quite robust with respect to the Our results are quite robust with respect to the parametric assumptions made in terms of the speed parametric assumptions made in terms of the speed of growth and the elasticities of demand as well as of growth and the elasticities of demand as well as substitution in production.substitution in production.

Results Under Imperfect Results Under Imperfect Competition and Non-frictional Competition and Non-frictional

UnemploymentUnemployment

The model is then run assuming that The model is then run assuming that we have sticky wages to see the we have sticky wages to see the effects of this on our modeling results.effects of this on our modeling results.

We then run the model under the We then run the model under the assumption of monopoly power in the assumption of monopoly power in the petroleum (and petroleum products) petroleum (and petroleum products) industry. Similar assumptions are industry. Similar assumptions are used for the power industry.used for the power industry.

Scenario 9 : Sticky wages in labor markets, deregulation of energy prices, and capital-enhancing technological change in energy sectors

Scenario 10: Scenario 9 without capital-enhancing technological change in energy sectors


Scenario 12: Scenario 9 plus capital-enhancing technological change in all sectors and a carbon tax

Scenario 13: Monopoly power in energy sector, deregulation of energy prices, and capital-enhancing technological change in the energy sectors

Scenario 14: Scenario 13 with energy efficient technological change in all sectors, instead of capital-enhancing technological change in the energy sectors

Scenario 15: Scenario 13 without any technological change

Scenario 16: Scenario 12 plus monopoly power in the energy sectors

GDP and Emissions for GDP and Emissions for Scenarios Nine through SixteenScenarios Nine through Sixteen

0 2 4 6 8

10 12 14 16

Sc 0 Sc 9 Sc 10 Sc 11 Sc 12 Sc 13 Sc 14 Sc 15 Sc 16

GDP CO2 Emissions

: Comparison of Scenarios









Scenario9 Scenario10 Scenario11 Scenario12 Scenario13 Scenario14 Scenario15 Scenario16

GDP 2.35% -24.96% 0.65% 17.26% -1.40% -2.45% -1.18% -1.21%Final level of Investment -4.18% -97.81% 9.32% 8.65% -3.95% -7.48% -3.98% -2.96%Oil output 12.58% -34.83% -24.95% -13.87% -14.88% -11.29% -24.36% -14.75%Power output -1.93% -33.11% -12.57% 11.80% -17.62% -25.78% -13.65% -17.67%Consumption 0.79% -1.27% 0.42% 16.68% -0.56% -0.77% -0.29% -0.65%Imports -0.01% -0.01% 0.00% -0.06% -0.01% -0.01% -0.01% -0.02%Exports 1.57% -3.87% -2.28% 3.75% -1.72% -1.28% -2.02% -1.59%Exports oil 12.14% -29.91% -24.42% -17.14% -14.84% -10.81% -24.53% -14.86%BoP surplus 23.85% -47.98% -28.34% 47.28% -25.91% -27.88% -40.32% -13.81%Cumulated welfare agent 1 0.97% -3.20% 0.25% 14.42% -0.28% -0.45% -0.44% -0.31%Cumulated welfare agent 2 1.00% -3.25% 0.25% 14.57% -0.28% -0.45% -0.44% -0.30%Cumulated welfare agent 3 0.69% -1.09% 0.32% 10.11% -0.18% -0.25% -0.21% -0.23%Cumulated welfare agent 4 0.39% 1.47% 0.45% 5.34% -0.07% -0.04% 0.05% -0.15%Terminal capital stock -2.01% -21.78% 6.45% 2.00% -1.85% -3.18% -1.17% -1.66%Cumulated Govt. revenue from PEMEX 1.02% 1.68% 3.69% -6.38% 0.34% 2.68% 4.73% 0.36%Cumulated Govt. revenue from CFE -4.65% -2.44% 2.44% 24.39% 0.00% -4.35% 2.33% 0.00%Cum. Govt revenue from other sources 0.50% -3.23% -0.54% 51.46% -1.32% -2.04% -1.42% -1.12%CO2 Emissions, percent change 11.79% -37.26% -24.65% -10.84% -13.18% -9.41% -21.73% -12.49%

Important Points From the Important Points From the Second Set of SimulationsSecond Set of Simulations

Technological change is essential for Technological change is essential for sustained growth.sustained growth.

The nature of the technological change, The nature of the technological change, however, is critical in terms of the however, is critical in terms of the environment.environment.

Carbon tax design is a great importance.Carbon tax design is a great importance. The effect of Monopoly is ambiguous.The effect of Monopoly is ambiguous. Persistent unemployment combined with Persistent unemployment combined with

carbon taxation can have disastrous effects.carbon taxation can have disastrous effects.

Emission Trading with the U.SEmission Trading with the U.S

The model is re-aggregated to allow us to The model is re-aggregated to allow us to see the workings of the forestry and see the workings of the forestry and agricultural sectors.agricultural sectors.

It is then re-run under the assumption that It is then re-run under the assumption that emitters of GHG’s have to purchase emitters of GHG’s have to purchase carbon sequestration “rights” in order to carbon sequestration “rights” in order to emit over a certain specified level.emit over a certain specified level.

Initially the analysis is limited to emitters Initially the analysis is limited to emitters and forest owners within Mexico.and forest owners within Mexico.

Emission trading with the U.S. Emission trading with the U.S. (continued)(continued)

The model of Mexico is then combined with The model of Mexico is then combined with a similar dynamic CGE model of the U.S.a similar dynamic CGE model of the U.S.

The model simulations are then re-run The model simulations are then re-run assuming that emitters from the U.S. are assuming that emitters from the U.S. are required to purchase sequestration “rights” required to purchase sequestration “rights” from forest owners in Mexico.from forest owners in Mexico.

The results of the two sets of simulations The results of the two sets of simulations are then compared to see what is most are then compared to see what is most cost effective.cost effective.

Table 9.1. Producing sectors and production goods

Producing Sectors Production Goods

1. Manufacturing Manufacturing Goods

2. Coal Mining Coal

3. Chemicals and Plastics Chemicals and Plastics

4. Fisheries Fish and Fish Products

5. Grains Grains

6. Livestock Livestock

7. Other Agriculture Other Agriculture

8. Forestry Forestry Products

9. Services Production Services

10. Transportation Transportation for Production

11. Electricity Electricity

12. Oil and Gas1. Crude Petroleum

2. Natural Gas

13. Refining Output Refining Output

Conclusions with Emissions Conclusions with Emissions TradingTrading

If (after some level of emissions) GHG emitters If (after some level of emissions) GHG emitters are required to purchase sequestration rights for are required to purchase sequestration rights for a certain percentage of their additional carbon a certain percentage of their additional carbon emissions, such rights can lower GHG levels both emissions, such rights can lower GHG levels both by sequestering significant levels of carbon in by sequestering significant levels of carbon in carbon sinks and by reducing the level of the carbon sinks and by reducing the level of the producers’ GHG emissions. producers’ GHG emissions.

The costs are relatively high if trading is The costs are relatively high if trading is combined to Mexico.combined to Mexico.

When trades between the U.S. and Mexico are When trades between the U.S. and Mexico are allowed, however the situation changes and the allowed, however the situation changes and the aggregate costs decline by over 80%.aggregate costs decline by over 80%.

Emissions trading conclusions Emissions trading conclusions (continued)(continued)

When permits are required, U.S. producers cut the When permits are required, U.S. producers cut the usage of all fossil fuels but do so relatively more usage of all fossil fuels but do so relatively more with coal and oil than on natural gas. This is with coal and oil than on natural gas. This is impossible for Mexican emitters to do and impossible for Mexican emitters to do and underscores the importance of international permit underscores the importance of international permit trading.trading.

Such gains come at relatively low costs when Such gains come at relatively low costs when countries with ample reserves of low carbon fuels, countries with ample reserves of low carbon fuels, such as the U.S., can participate.such as the U.S., can participate.

The potential for unintended spillovers such as The potential for unintended spillovers such as carbon leakage seem to be relatively small in scope carbon leakage seem to be relatively small in scope and easily managed with proper policy design. and easily managed with proper policy design.

General ConclusionsGeneral Conclusions

Two features (i.e. depletion and technological Two features (i.e. depletion and technological change) to a large extent drive the overall change) to a large extent drive the overall results of our simulation analysis in terms of results of our simulation analysis in terms of emissions. The relationship of the two is emissions. The relationship of the two is complex but critical to our analysis.complex but critical to our analysis.

An overall finding of our analysis is that An overall finding of our analysis is that energy efficient technological change is of energy efficient technological change is of major importance if Mexico is to seriously major importance if Mexico is to seriously reduce emissions without experiencing reduce emissions without experiencing harmful effects on its economic growth and harmful effects on its economic growth and welfare. welfare.

General Conclusions General Conclusions (continued)(continued)

It is also essential to eliminate market It is also essential to eliminate market distortions such as energy price distortions distortions such as energy price distortions and labor market imperfections if and labor market imperfections if policymakers want to guard against severe policymakers want to guard against severe economic contraction when carbon taxes economic contraction when carbon taxes or other similar sorts of emission controls or other similar sorts of emission controls are introduced.are introduced.

Finally, although the exercise of monopoly Finally, although the exercise of monopoly power by state owned energy producers power by state owned energy producers has the potential to decrease emissions has the potential to decrease emissions through supply restrictions, the use of through supply restrictions, the use of such power is not to be recommended.such power is not to be recommended.

……and some recent workand some recent work

Simulate the effect of extreme weather Simulate the effect of extreme weather events on the Mexican economy: droughtevents on the Mexican economy: drought

We use model used for emissions tradingWe use model used for emissions trading Scenarios cover:Scenarios cover:

No droughtNo drought Severe droughtSevere drought Adaptation policies (agric., forestry, power)Adaptation policies (agric., forestry, power)

Summary Table Quantities: Summary CGE Results Data for Mexico for 2027Scenario 1 - Bench 2-1 3-2 4-2 5-3 6-4

GDP, trillions pesos -2.03% -1.78% 0.18% -0.21% 0.17% 0.18%

Grain output -2.76% -10.78% 1.40% -1.43% 2.31% 2.78%

Livestock output -3.63% -12.83% 1.81% -1.85% 1.43% 1.76%

Other agriculture output -3.38% -11.87% 0.82% -3.38% -11.87% 0.82%

Forestry output -5.49% -17.31% 2.52% -5.49% -17.31% 2.52%

Power output -10.69% -3.45% 1.33% -1.45% 0.25% 0.23%

Consumption 0.51% -0.27% -0.08% 0.09% 0.00% -0.01%

Imports -0.04% 0.00% 0.00% 0.00% 0.00% 0.00%

Exports -3.99% -0.62% 0.00% 0.00% 0.05% 0.04%

Exports oil -37.54% -0.95% 0.31% -0.34% 0.09% 0.11%

BoP surplus -49.26% -14.57% 0.07% -0.03% 1.32% 1.21%

Cumulated welfare agent 1 -0.16% -0.31% 0.00% 0.00% 0.02% 0.02%

Cumulated welfare agent 2 -0.16% -0.31% 0.00% 0.00% 0.02% 0.02%

Cumulated welfare agent 3 0.13% -0.08% 0.05% -0.04% 0.00% 0.00%

Cumulated welfare agent 4 0.50% 0.24% 0.11% -0.10% 0.00% 0.00%

Terminal capital stock -5.60% -3.83% -1.02% 0.90% 0.48% 0.39%

Cumulated Govt. revenue from PEMEX -11.49% 0.54% 0.08% -0.15% -0.08% -0.08%

Cumulated Govt. revenue from CFE -1.08% 0.00% 0.55% -0.55% 0.00% 0.00%

Cum. Govt revenue from other sources 6.85% -0.75% 0.01% -0.02% 0.02% 0.02%

……and basic resultsand basic results

Drought has a sectoral impact, Drought has a sectoral impact, mainly on agriculture and grazing, mainly on agriculture and grazing, forestry, and power generation forestry, and power generation (hydro), and ripple effects (hydro), and ripple effects throughout the economythroughout the economy

Regressive impact on welfareRegressive impact on welfare Adaptation policies (technological Adaptation policies (technological

change and irrigation) can only partly change and irrigation) can only partly mitigate its effects.mitigate its effects.

Hacia el Futuro: Energy, Economics, and the Environment in 21 st Century Mexico

Documents

informacin energticasecretara

climate change3

simulation results

energadireccin general

emissions control

carbon emissions

emissions trading10

impact of climate change4