Can Consumer Responsibility Help Address Carbon Leakage Concerns

Can Consumer Responsibility Help Address Carbon Leakage Concerns? An Analysis of Participation vs. Non-Participation in a Global Mitigation Regime 19 th 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 CO 2 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 bilateral trade Introducing Leontief technical coefficient matrices A and self -sufficiency matrices S. Define fixed ratio of value added.

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

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

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.

Scenarios Base scenario S 1 S 2 S 3 S 4 Territorial responsibility r, s Consumer responsibility r, s Emission cap r r, s Emissions trading system Rule

Numerical simulation results 1 Maximization for Country r Item X 1_r X 1_s X 2_r X 2_s V_r V_s E_r E_s R_r R_s ER_r ER_s Q_r Q_s Q W_r W_s W Base scenario 410 214 660 291 519 231 207 138 387 210 597 519 231 750 S 1 358 263 660 283 503 247 160 107 3. 3 368 220 588 502 247 748 S 2 410 214 660 291 519 231 147 78 0. 4 0 19 0 387 210 596 517 233 750 S 3 410 214 660 291 519 231 146 77 0. 6 368 228 596 519 231 750 S 4 410 214 660 291 519 231 146 77 0. 4 0. 0 0. 6 0. 4 368 228 596 519 231 750

Numerical simulation results 2 Maximization for Country s Item X 1_r X 1_s X 2_r X 2_s V_r V_s E_r E_s R_r R_s ER_r ER_s Q_r Q_s Q W_r W_s W Base scenario 316 330 514 430 403 347 44 91 300 314 614 403 347 750 S 1 316 330 514 430 403 347 44 91 5. 8 294 314 608 398 347 745 S 2 316 330 514 430 403 347 44 91 5. 2 0. 7 0. 0 295 313 608 399 347 746 S 3 316 330 514 430 403 347 44 91 14. 5 310 290 600 371 347 718 S 4 316 330 514 430 403 347 411 458 5. 2 0. 7 61. 2 0. 0 356 253 608 391 355 746

Sensitivity analysis 1 Influence of an increase in carbon price by 100% Item S 2/r S 4/r S 2/s S 4/s R_r 100% -1% -100% R_s 0% 0% 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 X 1_r X 1_s V_s E_r E_s R_r ER_r Q W_r W_s W S 1/r 2% -2% 1% 3% 1% -50% 0% 1% 1% 0% 0% S 2/r 0% 0% 0% -50% 1% 0% 0% S 3/r 0% 0% 0% S 4/r 0% 0% 0% -50% 123% 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 S 2/s S 4/s R_s -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 X 1_r X 1_s X 2_r X 2_s V_r V_s E_r E_s R_r ER_s Q_r Q_s Q W_r W_s W S 1/r -12% 25% -22% 52% -20% 41% -66% 21% 75% 0% 0% -19% 43% 4% -21% 41% 0% S 2/r 0% 0% 0% 396% 0% 0% -2% 4% 0% S 3/r -23% 54% -21% 48% -67% 17% 4, 808% 0% 0% -12% 26% 3% -47% 48% -18% S 4/r 0% 0% 0% 4, 886% -100% 0% -2% 4% 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 S 2/s S 4/s ER_r -91% -100% ER_s Very large W_r 2% 2% W_s -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 capand-trade system between participation and nonparticipation 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 zhou@iges. or. jp; Hiroaki Shirakawa at sirakawa@urban. env. nagoya-u. ac. jp