1. 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

2. 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.

3. 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.

4. 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.

5. Analytical Framework 2  Equilibrium between supply, demand and bilateral trade  Introducing Leontief technical coefficient matrices A and self-sufficiency matrices S.  Define fixed ratio of value added.

6. 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

7. 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

8. 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.

9. Scenarios Rule Base scenarioS1S2S3S4 Territorial responsibility r, s  Consumer responsibility  r, s Emission cap  rr, sr Emissions trading system  

10. Numerical simulation results 1  Maximization for Country r ItemBase scenarioS1S2S3S4 X1_r410358410 X1_s214263214 X2_r660 X2_s291283291 V_r519503519 V_s231247231 E_r207160147146 E_s1381077877 R_r  3.30.40.60.4 R_s  0  0.0 ER_r  19  0.6 ER_s  0  0.4 Q_r387368387368 Q_s210220210228 Q597588596 W_r519502517519 W_s231247233231 W750748750

11. Numerical simulation results 2  Maximization for Country s ItemBase scenarioS1S2S3S4 X1_r316 X1_s330 X2_r514 X2_s430 V_r403 V_s347 E_r44 411 E_s91 458 R_r  5.85.214.55.2 R_s  0.7  ER_r  0.7  61.2 ER_s  0.0  Q_r300294295310356 Q_s314 313290253 Q614608 600608 W_r403398399371391 W_s347 355 W750745746718746

12. Sensitivity analysis 1  Influence of an increase in carbon price by 100% ItemS2/rS4/rS2/sS4/s R_r100% -1%-100% R_s0% 100% ER_r13%0%102%1% ER_s1,445%100%10,304%0% W_r0% -1% W_s1%0% 2% W0% 1% An increase in the carbon price will mainly influence domestic abatement efforts (R) and potential trade in emission credits (ER) sensitively.

13. Sensitivity analysis 2  Influence of an increase in unit abatement costs by 100% in Country r ItemS1/rS2/rS3/rS4/r X1_r2%0% X1_s-2%0% V_s1%0% E_r3%0% E_s1%0% R_r-50% 0%-50% ER_r0%1%0%123% Q1%0% W_r1%0% W_s0% W 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.

14. Sensitivity analysis 3  Influence of an increase in unit abatement costs by 100% in Country s ItemS2/sS4/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.

15. Sensitivity analysis 4  Influence of tightened emission cap by 20% in Country r ItemS1/rS2/rS3/rS4/r X1_r-12%0%-23%0% X1_s25%0%54%0% X2_r-22%0%-21%0% X2_s52%0%44%0% V_r-20%0%-21%0% V_s41%0%48%0% E_r-66%0%-67%0% E_s21%0%17%0% R_r75%0%4,808%0% ER_r0%396%0%4,886% ER_s0% -100% Q_r-19%0%-12%0% Q_s43%0%26%0% Q4%0%3%0% W_r-21%-2%-47%-2% W_s41%4%48%4% W0% -18%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.

16. Sensitivity analysis 4  Influence of tightened emission cap by 20% in Country s ItemS2/sS4/s ER_r-91%-100% ER_sVery large W_r2% 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.

17. 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.

18. Conclusions 2  In a global mitigation regime without full participation, a cap- and-trade system between participation and non- participation 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.

19. Thank you for your attention! Contact: Xin Zhou at zhou@iges.or.jp;zhou@iges.or.jp Hiroaki Shirakawa at sirakawa@urban.env.nagoya-u.ac.jpsirakawa@urban.env.nagoya-u.ac.jp