Macroeconomic Effects of Carbon Dioxide Emission Reduction:Cost and Benefits

Transcription

1 Journal of Cambridge Sudies 86 Macroeconomic Effecs of Carbon Dioxide Emission Reducion:Cos and Benefis Zhen LIU Tsinghua Universiy Jing LIN Ciy Universiy of Hong Kong Absrac: Global climae change is hihero he mos serious environmenal problem, and China s CO 2 emissions reducions have been one of he hoes problems discussed in he world. This paper quanifies he impacs of differen abaemen policies on economy based on a modified MACRO model. The empirical resuls show ha CO 2 direc emissions conrol wih he mos serious GDP loss is he mos effecive sraegies in erm of miigaing CO 2 emissions, and carbon ax on coal wih grea effecs and less economic loss is he mos suiable sraegy for China. Keywords: CO 2 emissions, Modified MACRO Model, Energy efficiency, Greenhouse gases School of Economics and Managemen, Tsinghua Universiy; liuzhen@sem.singhua.edu.cn

2 Vol 4. No.3 Sepember 2009 Journal of Cambridge Sudies 87 Ⅰ. Inroducion Emissions of global warming gases coninue o rise as he world burns ever more coal, oil and gas for energy. From he daa of Insiue for Environmenal Sudies, he effecs of emissions of CO 2 and oher greenhouse gases on he global climae are becoming visible, causing he changes in emperaure, sea level rise, amospheric circulaion paerns, ecosysems and so on(see Table 1). Table 1. The influence of climae change caused by greenhouse gas Objecs Global average surface emperaure Global Sea Level The exen and hickness of Arcic ice Precipiaion in he high laiudes of he Norhern Hemisphere Toal global economic losses from naural disasers Phenomenon Rised 0.6 in 20 Cenury Increased 0.1 o 0.25 meer Reduced by 10-15% in spring and summer Increased 0.5%-1.0% annually, and frequency of heavy rain rised 2%-4% Increased by 10 imes over he pas 40 years The risk of desabilizing he Earh s climae sysem is growing every day. There is evidence ha economic damage as a resul of exreme weaher evens has grealy increased over pas few decades. Such evens ake a heavy oll on social economies. Few hings can be more pressing for he proecion of ecosysems and he well-being of sociey han avoiding he caasrophic effecs of global warming. In 1998, drough and widespread wildfires caused by exreme weaher condiions resuled in US $276 million worh of damage. In he same year, floods along he Yangze River in China induced 4,000 deahs and US $30 billion economic losses. Compared losses in 1950s wih losses in he 1990s, Munich Re(2000) and Francis(1998) concluded a large par of he increase in losses was resuled from exreme weaher evens. Taken inflaion, insurance peneraion and price effecs ino accoun, while real global GDP increased by a facor of hree since 1950, he oal sum of exreme weaher-relaed damage increased by a facor of eigh. Table 2. The coss of naural disasers (Munich Reinsurance Company, 2000) Year Times Insured Losses (million Economic Losses (million US$) US$) ,200 3, ,700 5, ,300 12, ,200 19, ,100 15, ,800 40, ,200 24,400

3 Journal of Cambridge Sudies ,600 50, , , ,800 5, ,150 45, ,685 36,500 Based on Kyoo Proocol, China, India, and oher developing counries were no included in any numerical limiaion of he Kyoo Proocol because hey were no he main conribuors o he greenhouse gas emissions during he pre-reay indusrializaion period. However, even wihou he commimen o reduce according o he Kyoo arge, developing counries do share he common responsibiliy ha all counries have in reducing emissions. China, as he world s second larges emier of carbon dioxide, is aiude and acions will become he focus of he coming negoiaions. For developing counries, o choose which kinds of policies will depend on heir economic developmen, carbon dioxide emissions, energy supply, and he poliical srucure and so on. On he one hand, China s aiude would influence he inernaional negoiaions; on he oher hand, sudy he favorable policy will help o do he suiable selecion. This proposal will sudy he cos and benefi of differen emission reducion policies, in order o provide he guide and reference. Ⅱ. Mehodology There are many maure energy-economy-environmen models used hroughou he world. The research on he influence of Carbon Dioxide Emission Reducion mainly based on hese models o analyze he combined effecs of Carbon Dioxide Emission Reducion on environmen improvemen and he naional economy. The impac of carbon emission reducion policy is a relaively new research area, hers is no a generally acceped energy-economic-environmen model, hough a variey of exising models and heir improved ones have cerain degree of usage. Table 3 shows several ypical models. Table 3. The several ypical models Top-down models Boom-up models Mehods Economerics, general equilibrium heory and linear programming heory Linear programming and nonlinear programming heory Typical Models 3Es-Model MACRO GEM MARKAL EFOM AIM I/O Typical Lieraure Arvydas (2000) Toshihiko (2004) Lim (1998) Proos (1992) Robinson (1999) Dolf (2001) Hannele (2004) Mikiko (2000) Casler (1998) Nowadays, Macro Model, CGE model, MARKAL model and 3ES model have become he primary models for academic analysis of he effecs on carbon dioxide emission reducion policy.

4 Vol 4. No.3 Sepember 2009 Journal of Cambridge Sudies 89 As a macroeconomic model, MACRO describes he relaionship of energy consumpion, capial, labor force, and GDP by producion funcion. Is objecive funcion is he oal discouned uiliy of a single represenaive producer-consumer. The maximizaion of his uiliy funcion deermines a sequence of opimal savings, invesmen and consumpion decision. Moreover, we can obain he carbon dioxide emission from he energy consumpion, and he relaionship beween he GDP and carbon dioxide emission. Therefore, his proposal will use MACRO model o analyze he differen emission reducion policies on he impac of macroeconomics, and he daa can be obained from he World Bank and he Bureau of Saisics. This proposal consrucs a modified model o evaluae possible effecs for miigaing carbon emission for China. According o he simulaion of his sudy, here are 6 scenarios for modeling sraegies: Carbon Tax (including 4 scenarios), CO 2 emissions direc conrol, Carbon inensiy decline. Based on a modified MACRO model, we esablish a dynamic relaionship. A he naional level, he oal effec of a counry s economic aciviies can be expressed as follow, ( i, ) α β GDP = ak L E γ (1) Here, we use Cobb-Douglas producion funcion, raher han he usual of Consan Elasiciy Subsiuion producion funcion in Markal-Macro Model, because he resul of he former is more applicable o a dynamic ieraive model, and has beer saisical predicabiliy. And he consrains as follows, L = 1 (1 + + r) L (2) GDP = C + I + Ec (3) K = 1 K + I + εk (4) K T I (5) T i, i, 1 3, i i i= 1 3 E = b + b GDP + b E + b p (6) CO = E μ (7) 2 i, i 3 Ec = p E (8) i, i, i= 1 During which GDP is he gross naional produc in period, α, βγ, is he oupu flexibiliy of capial, labor and energy, a is he coefficien of he CD producion funcion, E i is he energy inpus of coal, oil, naural gas and ohers Ec is he energy coss in he period, ε is he depreciaion of asses in he period, C is he consumer in he period, I is he invesmen in

5 Journal of Cambridge Sudies 90 he period, p i, is he price of he i kinds of energy, r is he annual growh rae of economics, μ is he coefficien of carbon dioxide emission of he i kinds of energy, CO is he carbon i dioxide emission in he period. Fig. 2 shows he dynamic process. 2 Energy consumpion, Capial, Labor force ( i, ) α β GDP = ak L E Based on CD producion funcion γ Oupu GDP = C + I + Ec 3 Ec = p E i, i, i= 1 Consumer, Invesmen K = 1 K + I + εk, L = 1 (1 + + r) L E = b + b GDP + b E + b p i, i, 1 3, i i 3 Energy Demand, Oupu, Energy Price Figure. 1 The dynamic process of a modified MACRO model In he modified model, (2) represens he labor force growh; (3) is he balance equaion, assuming ha all he curren oupu used for curren consumpion, invesmen and energy coss; (4) is he dynamics of accumulaion equaion of he fixed capial sock, assuming ha he capial sock combined he beginning of he curren capial sock wih invesmen minus depreciaion; (5) is he limied condiions, considering ha he final invesmen is bigger han a capial sock; (6) is he energy demand funcion, deermined by GDP as well as former energy consumpion and energy prices which is given by equaion (8); (7) is he carbon dioxide emissions funcion. The overall model includes 13 variables and eigh dynamic equaions, and is dynamic relaionship is compleed by capial accumulaion and energy demand. In he sudy of macroeconomic model, he daa covers over 20 years. Also in 2012, China will join he carbon emission reducion

6 Vol 4. No.3 Sepember 2009 Journal of Cambridge Sudies 91 program. So we assume ha 2000 is he iniial period, and 2022 is he end period o sudy social cos and benefi if China will implemen carbon emission reducion in Ⅲ. Resuls Based on regression analysis over he year , we obain he Cobb-Douglas producion funcion as below: GDP () = exp( 10.29) K () L () Ei () (9) i From he above resuls, nearly 15 years China s growh rend shows increasing reurns o scale, > 1. In he subsequen calculaions, we will use he price in 1990 o obain he value of GDP in order o remove he inflaion effec. A he same ime, we mainly consider energy consumpion of coal, peroleum and naural gas. Using he consumpion and price indices of hese hree kinds of energy as dependen variable, he demand funcions in are obained respecively based on price indices of indusrial producs in 1990 under he mehod of ime serie. Coal = 1.32* Oil ( 1) * Pc * Po * Coal( 1) (10) Oil = * Pg * GDP * Po * Oil( 1) (11) Gas = * Pc * GDP * Gas( 1) (12) Where Coal, Oil and Gas are he demand in he period, Pc, Po and Pg are he price of here hree differen kinds of energy, Coal(-1), Oil(-1) and Gas(-1) are he demand in he las period. Table 4. Energy demand funcion Coal Dmand funcion Peroleum Dmand funcion Naural gas demand funcion 0.64 Variables Coefficien Variance Oil(-1) Pc Consan Po Coal(-1) Pg GDP Po Oil(-1) Consan Pc GDP Gas(-1) Wihou aking any measures o reduce carbon dioxide emissions, GDP, energy demand and oher economic indicaors during is shown in Table 5 under he assumpion ha he

7 Journal of Cambridge Sudies 92 poenial economic growh rae is 6.5%. Using hese resuls as he benchmark, he influence of differen emission reducion polices on economic indicaors is obained as Table 6 shown. Table 5. Economic indicaors forecas wihou CO2 emission reducion Final comsupion(billion) Invesmen(billion) GDP(billion) Coal(Million ons of sandard coal) 34 5 Peroleum (Million ons of sandard coal) Naural gas(million ons of sandard coal) Energy(Million ons of sandard coal) CO 2 (Million ons of sandard carbon) Table 6. The social coss and emission reducion effec of differen emission reducion policies Policies Direc emissions conrol Emissions inensiy conrol Holland carbon ax Sweden carbon ax Progressive carbon ax Carbon ax on coal only Loss rae of GDP growh The proporion of CO 2 reducion in 2020 The social cos of emission reducion(yuan/on) % 42% % 6.67% % 7.12% % 25.69% % 23.0% % 22.52% 2719 In he pos-kyoo, China s CO 2 emissions reducions will be remarkable and will always be he one of he hoes problems. If China will commi o cu is greenhouse gases emissions in he

8 Vol 4. No.3 Sepember 2009 Journal of Cambridge Sudies 93 fuure, hen wha effecs will occur? In order o achieve his objec, a modified MACRO model is consruced o evaluae possible effecs for miigaing carbon emissions for China. According o he simulaion of his sudy, he following conclusions are obained: 1) Energy has a grea conribuion on producion oupu by a weigh of This means ha China s economic growh depends on energy consumpion. Therefore, he consrain of carbon dioxide emissions induced by fossil fuels has a negaive impac on he economy. 2) All emissions reducion policies have adverse effecs on he economy. China is in he period of rapid economic growh. So o conrol energy consumpion and carbon dioxide emissions, he economic developmen will face a big loss. 3) Differen emissions reducion policies have marginal differen social cos. There are 6 scenarios for modeling sraegies: carbon ax(including 4 scenarios), CO 2 emission inensiy conrol and CO 2 direc emissions conrol. The empirical resuls show ha GDP will suffer a loss in all hese scenarios. The above resuls in Table 6 shows he emission direc conrol is he mos effecive sraegies in erms of miigaing CO 2 emissions bu will induce he greaes GDP loss, follow by Sweden carbon ax and progressive carbon ax. And he emissions inensiy conrol and carbon ax on coal cause he small GDP loss, bu effecs on emission reducion are no as good as he ohers. From an economic poin of view, i is no quie suiable o sabilize he China s carbon dioxide emissions a curren levels. China is a developing counry. Alhough i has responsibiliy o reduce carbon emission, he economic developmen is equally imporan. Based on he overall conclusions above, we sugges ha China should no commi o direcly cuing CO 2 emissions on he curren emissions level. Also, he economic loss caused by carbon ax on coal in all scenarios is very small, and he effec on emission reducion is grea effec. Considering he balance on less GDP loss and more CO 2 emissions reducion, we sugges ha China should selec carbon ax on coal which has small GDP loss bu grea CO 2 reducion. Ⅳ. Conclusion G1obal climae change is hihero he mos serious environmenal problem,and is also one of he mos complicaed challenges in he 21 s cenury. As he larges developing counry and he second larges CO 2 emissions source nex o he US, China s CO 2 emissions reducions have been one of he hoes problems discussed by academe, environmenal adminisers and all governmens in he world. I is of grea imporance o analyze China s CO 2 emissions, which is beneficial o China s susainable developmen, bu also can conribue o miigae he global climae warming. Therefore, his paper quanifies wha impacs possible differen abaemen policies will have on economy in he fuure based on a modified MACRO model. In our research, alhough CO 2 direc emissions conrol has he grea effec on reducing he CO 2 emission, i causes a grea loss on GDP. Combined he GDP loss and effec on CO 2 emissions reducion, he empirical resuls show he carbon ax on coal will be he bes sraegy for China. Reference

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