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Economic Effects of Co-ordinated and Non-co-ordinated Permit Schemes in an EU-Bubble An Applied General Equilibrium Analysis with the GEM-E3 Model Tobias F.N. Schmidt, ZEW. Overview of the Presentation. What is the issue to be analysed? What are the characteristics of the GEM-E3 model?

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  1. Economic Effects of Co-ordinated and Non-co-ordinated Permit Schemes in an EU-BubbleAn Applied General Equilibrium Analysis with the GEM-E3 ModelTobias F.N. Schmidt, ZEW

  2. Overview of the Presentation • What is the issue to be analysed? • What are the characteristics of the GEM-E3 model? • What answers can the model give with respect to the issue analysed? • Which conclusions can bedrawn?

  3. What is the issue? • Burden sharing agreement of the EU Council of Ministers versus trading of emission rights. • What are the economic consequences of sticking to domestic action? • What are the impacts of trading of emission rights across the EU?

  4. Table 1: EU Burden Sharing Agreement

  5. Characteristics of GEM-E3 • CGE-model for studying economy-energy-environment interactions • Multi-country, multi-sectoral model (14 EU-countries, 18 sectors) • Open economies linked through bilateral trade flows • Social accounting framework • Recursively dynamic • Standard version: perfect competition

  6. Production Structure in GEM-E3

  7. Consumption in GEM-E3

  8. Baseline and Scenario Assumptions • Baseline- 1.8% to 2.5% annual growth in the EU- increase of world energy prices • General scenario assumptions- 8% reduction of EU-wide 1990 CO2 emissions until 2012- Realisation through tradable emission permit schemes- Reduction & trade of permits realised during the budget period 2008-2012

  9. Specification of the Permit Scheme • Initial allocation of permits: free of charge according to burden sharing agreement of the Council of Ministers. • Grandfathering across firms and households within the countries. • Marginal decision of polluters based on opportunity costs • Rents related to free-of-charge allocation of permits increase capital income

  10. Policy Scenarios • Policy 1: No Tradenon-co-ordinated domestic actions:national permit schemes • Policy 2: Free Tradeco-ordinated action: EU-wide permit scheme, i.e. free trade of permits across member states

  11. Table 2: Total Atmospheric Emissions in EU-14 in 2012

  12. Table 3: Macroeconomic Aggregates for EU-14 in 2012

  13. Table 3: CO2 Emissions and Permit Price in 2012

  14. Table 4: CO2 Emissions and GDP in 2012

  15. Table 5: Comparing Free Trade and No Trade

  16. Reasoning • Buying or holding permits increases input prices for primary energy inputs--> distortion in intermediate demand. • Rents related to free-of-charge allocation and sale of permits increase capital income. • The distortionary effect of the former exceeds the re-distortion achieved by the latter.

  17. Table 6: Trade of Permits and Ceilings • Ceilings: EU proposal • formula:

  18. Conclusions I • Free trade of permits reduces the overall mitigation cost for the EU. • If trade is on the level of private entities, there are - compared to the no trade case - winners and losers of free trade: Net-buyers win, net-sellers lose. • Considering opportunity costs for holding permits produces distortions that are not fully compensated by the rents linked to the sale of permits (reasoning: public finance).

  19. Conclusions II • An outcome based allocation rule of the overall gains could make all countries better off. • The issue of ceilings is of minor importance within the EU-bubble. • Under free trade of permits, only Greece and Portugal (net-sellers) would exceed the amount allowed by the EU proposal.

  20. Table 7: CO2 Target and Actual Effort in 2012

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