Climate Policy within an International Emission Trading System Lars Bohlin Department of Economics, Örebro University

Policy issues discussed in the paper 1.Should manufacturing have exemptions on CO 2 taxes? 2.Should ETS installations have exemptions on CO 2 taxes? 3.What should the relation be between the tax rate on fossil fuel and the tax rate on electricity? 4.What is the optimal supply of allowances to domestic firms? 5.What is the impact from the introduction of ETS?

Conclusions 1.Manufacturing should have the same tax rate on CO 2 as households and services. 2.Even ETS installations should have the same tax rate. 3.Before ETS optimal electricity tax is high, after it is 0. 4.The optimal supply of allowances is 0. 5.ETS gives small macroeconomic impacts, all ETS industries gains, electricity producer gains a lot.

The model An open economy computable general equilibrium model: A large amount of supply and demand equations for different industries, households and government that are solved simultaneously. SAINT a Standard CGE model for Analysis of Indirect Taxation.

Carbon leakage Assumption 1 all adjustments in rest of the world are at the production side The change in foreign production = the change in net trade. Net trade is multiplied with emission coefficients. Assumption % Carbon leakage in ETS industries.

What is the impact from the introduction of ETS? Polluter gains principle

Optimal tax rates before ETS Optimal tax rates after ETS

Prices in CGE models Normalizing prices to one Example: price of electricity: Data from Sweden 2001 Pulp and paperhouseholds Use GWh Amount of money spent less taxes million SEK Normalised quantity unit GWh Equal unit tax rate SEK per kWh 2.671

Prices in CGE models The Bohlin method Example: price of electricity: Data from Sweden 2001 Pulp and paperhouseholds Use GWh Amount of money spent less taxes (million SEK) Average price less taxes SEK per kWh Equal unit tax rate per kWh 11

Prices in CGE models The Bohlin method Pulp and paper households Basic price Trade margin Unit tax VAT

Prices in CGE models The Bohlin method Pulp and paper households Basic price Trade margin Unit tax VAT Fix Trade Margin

Prices in CGE models The Bohlin method Pulp and paper households Basic price Trade margin Unit tax VAT Fix Trade Margin Unit tax

Gross output Other intermediates Leontief Capital, labour, energy and transport services CapitalLabour, energy and transport services Labour Energy and transport services Diesel, gasoline and transport services Other energy commodities Water transports Diesel Land transports Gasoline Air transports 4242 District heating Bio fuel Gas Light fuel oil Electricity Heavy fuel oil Figure 2.1 Nest structure of the production functions The numbers in the ellipses refers to the elasticity of substitution between each aggregate. The top number in the long run elasticity and the bottom number is the short run elasticity.

Total household consumption Other manufactories Other services LES Diesel, gasoline and transport services Other energy commodities Water transports Diesel Land transports Gasoline Air transports 4242 District heating Bio fuel Gas Light fuel oil Electricity Heavy fuel oil Figure 2.2 Nest structure of the consumption functions The numbers in the ellipses refers to the elasticity of substitution between each commodity. The top number is the long run elasticity and the bottom number is the short run elasticity.