Coal Markets and the Kyoto Protocol

Miles LightUniversity of Colorado, Boulder

Charles KolstadUniversity of California, Santa Barbara

Thomas F. RutherfordUniversity of Colorado, Boulder

January, 1999 AEA Annual Conference SGE Session on International Trade

Outline of Talk Key Issues which connect Climate Change and

International Trade Global emissions targets Carbon “leakage”

Development of the International Coal Market Toward a homogeneous coal commodity

Modeling framework - A CGE analysis of carbon abatement using the GTAP/IEA dataset

Results and Policy Prescriptions

Issues Coal accounted for 40% of CO2 emissions in 1995.

Despite coal’s large role in determining global carbon emissions, coal markets have been neglected.

International coal is becoming homogeneous, which implies carbon “leakage” and abatement costs may be much higher than anticipated.

Possible policy: Carbon export restrictions for coal. Leakage rate and abatement costs fall substantially But this tax may be controversial

Insights If coal continues to develop into a homogeneous commodity, current

studies under-estimate the costs of attaining a global emissions target.

The increased costs are caused by substantially higher carbon leakage rates: from 20% to 40%.

Key difference: differentiated coal assumption limits coal flows when prices change in US, China.

An export tax upon coal would effectively limit coal migration, and leakage, but such a policy may be contested by oil exporters.

A Coal export tax is a source based tax, where the abating countries receive the tax revenues.

Oil would be subject to a use based tax, where the abating countries also receive the tax revenues.

International Coal Trade There is a unified, developed international coal market

Trade is 12% of total production, compared with 4% 25 years ago

Most coal prices follow the US FOB price (Ellerman 1985) Competition has increased as Indonesia, Venezuela,

Colombia, and Former Soviet Union have entered the market Technology allows for higher substitutability between coal

types Pulverized Coal Injection (PCI) allows coking coal to be

replaced by steam coal in steel mills Coal washing and slurries increases the embodied energy in a

ton of coal Mixing different coal types Coal prices depend mostly upon embodied energy content

The Model Static, general equilibrium framework Data combines the GTAP dataset with the IEA energy

statistics to keep value flows consistent with real flows. World is partitioned into 13 regions and 8 types of goods. 7 goods are energy specific, the last being ‘all other

goods’. An Arrow-Debreu equilibium is supported by zero excess

profits, market clearance and budget exhaustion. A long-term outlook is adopted, so unemployment and

other frictions are ignored.

Key Equations An ad-valorem tax is applied to fossil fuels according to the

carbon content:

International trade adopts the Armington assumption: differentiated products between domestic and imports, as well as across imports from different regions.

CES structure for Armington Agregate Commodity:

We vary and which allows for both heterogeneous and homogeneous coal trade.

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Results Leakage table: Carbon leakage doubles when coal is homogeneous.

Percentage Leakage Rates in 2010 with OECD (Kyoto) Abatement

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Asia 1.56 1.73 1.83 2.37

Brazil 0.22 0.28 0.31 0.41

Central Europe 0.82 0.97 1.11 1.14

China 4.43 9.12 13.07 24.35

India 0.25 0.35 0.57 4.16

Mexico+OPEC 2.95 3.03 3.04 2.93

R.O.W. 3.78 4.77 5.24 4.07

Global 14.01 20.25 25.17 39.44

Global Emissions 7.79 7.85 7.90 8.08

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Emissions Units: Billions of Metric Tons per year.

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Results (cont.) Welfare falls from -0.4 to -1.1 for Annex B, rises slightly for China and India, and

falls steeply for OPEC and oil exporters. Percenatge Welfare Changes in 2010 with OECD (Kyoto) Abatement

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Asia 0.08 0.10 0.12 0.21

Brazil 0.09 0.11 0.12 0.18

Central Europe 0.31 0.34 0.37 0.53

China 0.13 0.17 0.20 0.40

Europe -0.20 -0.28 -0.36 -0.88

India 0.18 0.21 0.24 0.62

Mexico+OPEC -0.91 -1.02 -1.12 -1.63

Other OECD -0.94 -0.91 -0.93 -1.58

R.O.W. -0.07 -0.08 -0.09 -0.08

USA -0.50 -0.58 -0.67 -1.16

Global Leakage 13.74 22.08 29.86 59.66

Abatement Mult. 1.01 0.97 0.94 0.82

Global Emissions 7.80 7.80 7.80 7.80

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Policy: Export Taxes Effecively reduces carbon leakage from coal exports. It is optimal to increase tax until exports to non-abating

countries is eliminated. Marginal costs of abatement outweigh marginal benefit of lower export taxes.

But controversial: OPEC, other oil exporters will contest any export tax policy, due to the conflict between use-based taxes with source-based taxes.

However, export taxes do not improve welfare proportionally.

Leakage, abatement and export taxes: Less abatement as coal prices increase for non-abating

regions.