Transcript On the Effect of Greenhouse Gas Abatement in Japanese

On the Effect of Greenhouse Gas
Abatement in Japanese Economy: an
Overlapping Generations Approach
Shimasawa Manabu
Akita University
March 2006
1
Slide2 Background

Goal of the project: the model analysis using
Japanese NAMEA.

Key future in this paper: multi-sector, lifecycle agents.

Focus is on intergenerational equity of the
greenhouse gas abatement policy.
2
Slide3 Background


The policy aimed at mitigating the problems
of climate change has very long time horizon.
The greenhouse gas emission abatement
policy has twofold aspects:
- (i) the effects to present various industries
and macro economy
- (ii) the intergenerational equity problem
3
Slide4 Background


In Japan many researchers used simulation model
in order to quantify the effect of greenhouse gas
abatement policy.
- MARIA (Prof.Mori Tokyo university of Science)
- AIM model (NIES)
- GAMES (Prof.Goto Univ. of Tokyo )
But they focused only one aspect, i.e., “the effects to
present various industries and macro economy .”
4
Slide5 Background

This paper presents a multi-sector
overlapping generations (OLG) model that
captures important characteristics of
Japanese economy and industrial structure in
order to explore the intergenerational effects
of the CO2 emissions abatement policy.
5
Slide6 Background

A number of papers written after the seminal
study by Auerbach and Kotlikoff (1987) have
examined the impacts of policy changes on
the intergenerational equity by using
computable general equilibrium models with
the overlapping generations.
- Now, A-K type OLG model has been
typical tool in order to investigate the impacts
of policy changes on intergenerational
redistribution.
6
Slide7 Background


Why we use NOT infinitely-lived agent (ILA)
model BUT overlapping generations (OLG)
model ?
We believe that the OLG framework has
several advantages compared to the ILA
model from the following reasons.
7
Slide8 Why OLG?
- (i) to investigate distributional effects
between generations of greenhouse gas
abatement .
- (ii) Schelling (1995) pointed out that using
the ILA model in the context of environmental
problems involves a fallacy of composition on
the intergenerational fairness.
8
Slide9 Structure of Presentation





Background to Project and this paper
Overview of the Model
Simulation Analysis
Comparative Analysis
Main Conclusions
9
Slide10 The Model

We use Rasmussen Model(2003) with
Japanese SAM.

The model assumes
- overlapping generations
- perfect foresight households
- eight sectors and nine goods
- benchmark year 2000
10
Slide11 The Model
- calibrated to a 2000 SAM describing the
Japanese economy
- perfect competition
- no uncertainty
- infinite supply & demand elasticities for
exports and imports to and from the world
market
11
Slide12 The Model
- endogenous labor supply
- The effects of greenhouse gas reduction
are evaluated by considering the effects of an
emissions tax that limits CO2 emissions by
an amount roughly conforming to that
required by the Kyoto protocol
Tobias N. Rasmussen (2003) “Modeling the economics of greenhouse
gas abatement: An overlapping generations perspective” Review of
Economic Dynamics
12
Slide13 The Model

8 sectors
(1) Iron and Steel
(2) Chemical products
(3) Petroleum refining & coal prod.
(4) Electric utilities
(5) Gas utilities
(6) Energy intensive industries
(7) Other manufacturing industries
(8) Other industries
13
Slide14 The Model

9 goods
(1) Iron and Steel
(2) Chemical products
(3) Petroleum refining & coal prod.
(4) Electric utilities
(5) Gas utilities
(6) Energy intensive industries
(7) Other manufacturing industries
(8) Other industries
(9) Non-comp imports
14
Slide15 The Model

Production
- production activities are modeled by the
nested constant elasticity of substitution
(CES) and Leontief functions
15
Slide16 The Model



Each sector produces multiple goods and all
goods are traded on the world market.
Armington specification is adopted to account
for the simultaneous presence of imports and
exports.
Energy enters production and final demand in
the form of a composite of the 5 energy
goods.
16
Slide17 The Model

Output in non-fossil-fuel production sector
Tobias N. Rasmussen
(2003) “Modeling the
economics of greenhouse
gas abatement: An
overlapping generations
perspective” Review of
Economic Dynamics
17
Slide18 The Model

Output in fossil-fuel production sector
Tobias N. Rasmussen
(2003) “Modeling the
economics of greenhouse
gas abatement: An
overlapping generations
perspective” Review of
Economic Dynamics
18
Slide19 The Model

Commodity trade
Tobias N. Rasmussen
(2003) “Modeling the
economics of greenhouse
gas abatement: An
overlapping generations
perspective” Review of
Economic Dynamics
19
Slide20 The Model

Energy for production and final demand
Tobias N. Rasmussen
(2003) “Modeling the
economics of greenhouse
gas abatement: An
overlapping generations
perspective” Review of
Economic Dynamics
20
Slide21 The Model

Household
- each generation enters the model (at age 20) and die (at
age 80) at the end of year g + N (N=59).
- each generation chooses consumption and leisure to
maximize his/her intertemporal utility.
21
Slide22 The Model
max ug (zg , t , t) 
g  59

t g
 1 


1 ρ

t-g
z g1-,εt
1- ε
subject to z g , t  φc g1-,σt  (1 - φ )ll
g  59
 p cg , t 
t g
C
t

1
1- σ 1- σ
g ,t
g  59
F
(w
e
lw

p
 t g , t g , t t transferg , t )
t g
ll g , t  lw g , t  ωg , t
c: consumption, ll: leisure, ρ: discount rate, ε: the inverse of intertemporal
elasticity of substitution, φ: weight on consumption, σ: the inverse of the
elasticity of substitution between consumption and leisure, e: age-related
productivity profile, ω: time endowment in efficiency units, pC: the price
index for composite goods, transfer: a lump sum transfer.
22
Slide23 The Model

Household demand structure
Tobias N. Rasmussen
(2003) “Modeling the
economics of greenhouse
gas abatement: An
overlapping generations
perspective” Review of
Economic Dynamics
23
Slide24 The Model

Model Closure
- (i) Trade balance
X
j
j ,t
-  M j , t  (1  γ ) CAS2000
t
j
X: export, M: import, CAS: current account surplus at bench year,
γ: effective growth rate
24
Slide25 The Model

(ii) government budget balance
τ tLwt Lt  τ tK rt Kt 
Y Y
τ
 h ph Yh , t 
h
M F
τ
 j pj , t M j , t
j
 (1  γ )t G2000 - GDEF2000 (1  γ )t
τL: labor tax, L: aggregate labor, τK: interest rate tax, r: interest rate,
K: aggregate capital stock, τhK: commodity tax in sector h, phK:
output prices in sector h, Yh: output in sector h, τjM : import tax of
goods j, pjF: import prices of goods j, G2000: government
expenditure level at bench year, GDEF2000: government deficit level
at bench year.
25
Slide26 The Model

Dynamic Equilibrium Condition
YR  (r  δ )K , I  (γ  δ )K
YR  I
 I(r  δ )  YR(γ  δ )  dynamic equilibrium condition
YR: capital income at bench year, δ: depression rate, I: investment
expenditure at bench year.
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2100
2095
2090
2085
2080
2075
2070
2065
Benchmark
2060
2055
2050
2045
2040
2035
2030
2025
3.5
2020
4
2015
2010
2005

2000
Slide27 Simulation
CO2 emission
Kyoto comittment
3
2.5
2
1.5
1
0.5
0
27
Slide28 Simulation

Tax on CO2 emission (thousand yen/metric ton of carbon)
28

20
00
20
0
20 5
1
20 0
15
20
2
20 0
2
20 5
30
20
3
20 5
40
20
4
20 5
5
20 0
55
20
6
20 0
65
20
7
20 0
7
20 5
80
20
8
20 5
9
20 0
95
21
00
Slide29 Simulation
Consumption level (% change from baseline)
0
-1
-2
-3
-4
-5
-6
-7
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Slide30 Simulation
Equivalent variation by generations (% change from baseline)
0
-0.5
-1
-1.5
-2
-2.5
-3
2100
2095
2090
2085
2080
2075
2070
2065
2060
2055
2050
2045
2040
2035
2030
2025
2020
2015
2010
2005
-3.5
2000

30
Slide31 ILA model
 1 

max ug (zt )   
~
t 0  1  ρ 
1 r
~
ρ 
-1
ε
(1  γ )

t -g
zt1- ε
1- ε
31
Slide32 Comparative Analysis
Consumption level (% change from baseline)
0
-1
-2
-3
-4
-5
-6
2100
2095
2090
2085
2080
2075
2070
2065
2060
2055
2050
2045
2040
2035
2030
2025
2020
2015
2010
2005
-7
2000

32
Slide33 Comparative Analysis
Equivalent variation by generations (% change from baseline)
0
-0.5
-1
-1.5
-2
-2.5
-3
2100
2095
2090
2085
2080
2075
2070
2065
2060
2055
2050
2045
2040
2035
2030
2025
2020
2015
2010
2005
-3.5
2000

33
Slide34 Main Conclusions


The cost of greenhouse gas emission abatement
policy is distributed between generations unequally;
small for current generations, large for future
generations.
- in the OLG setup, each generation maximizes
ONLY his/her own utility, NOT his/her descendants’.
- the reduction cost of CO2 abatement would rise
rapidly, because we need to consume more fossil
fuel in the process economy evolve under the
constant technical level.
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