1 TETRIS WP6 – Quantitative Analysis of International Emissions Trading and Linkages between Workpackages Christoph Böhringer, Ulf Moslener and Niels Anger Presentation for Project Meeting, Amsterdam, June 21, 2006

2 WP6: Structure of the Presentation PART I:Modelling concept of WP6 PART II: Linkages between workpackages

3 PART I:Modelling concept of WP6

4 ZEW Workpackage leader: Workpackage participants: Ecoplan CCAP ECN NTE WP6: Objectives Extend existing CGE model of international trade and energy use with a concrete representation of the EU ETS Integrate project-based JI and CDM within top- down framework accounting for -Transaction costs -CDM-specific investment risks -Technology transfer

5 WP6: Workplan 1.EU ETS analysis National allocation plans (NAPs): EU-25 (country level) Complementary EU policies (taxes) for non-ETS sectors Update of data base: GTAP-6, IEA/DOE energy outlooks Simulation of economic and emission impacts (based on CGE analysis) 2.Extensions Explicit bottom-up CDM/JI supply curves (cost-potential) Bottom-up (technology-specific) transaction costs CDM Investment risk indicator Technology transfer completed in progress

6 Complementary MAC incorporation Partial equilibrium: SIMAC General equilibrium: PACE Direct + indirect (macro) impacts Strengths: Comprehensiveness, (market interactions, income) Explicit MACs based on BU or TD approach Discrete step function or continously differentiable functional form (fit), e.g.: MAC Direct impacts (carbon market only) Regional compliance costs Strengths: transparency, communication abatement Explicit CDM supply curves based on BU Macro impacts also for CDM host countries Macro impacts except for CDM host countries Implicit CDM supply curves

PACE: CDM Technology Transfer Variant 1: Variant 2 (optional): CDM Emissions trading Choice of trading regions and sectors (r, i): Alternative sectoral coverage for CDM host countries (restricted vs. unlimited)  Analogous modelling of CDM and emissions trading. Model does not explicitly capture: - CDM induced technology changes - CDM-specific investment flows between host and donor CER transfer and technology transfer AAU transfer

8 Assessment of Technology Transfer A) Bottom-up approach  2-/3-step procedure (PE&GE): 1.Determine equilibrium carbon prices in model analysis (WP6) 2.Deduce transferred technologies from bottom-up CDM supply curves and database (WP3) 3.Determine investment flows from donor to host country (WP3+WP6)  Technology-based approach B) Top-down approach – optional (GE only): Multi-regional CGE model Non-project based CDM for regions and sectors to be specified Modelling of efficiency improvements in the electricity sector  Macroeconomic aspects of technology transfer

9 Transaction costs and investment risk Transaction costs: Project based transaction costs (WP3) -Upward shift of CDM supply curve -Modelling: Premium on CER price Investment risk specific to CDM: Composite investment risk indicator CPI (WP1) -Risk premium on CER price -Upward shift of CDM supply curve (risk lowers expected return of CDM projects)

10 PART II: Linkages to other workpackages

11 Model Inputs CDM supply: Project-based abatement cost data (CDM) (WP3) Project-based technology data (WP3,WP2) Project-based transaction costs (WP3) CDM investment risk: Country-specific risk indicator (WP1) Emissions data Eastern Europe: Emission projections (WP5)

12 WP6 Linkage Phase Participants: ZEW, Ecoplan, ECN, Natsource, CCAP Mapping 1: Countries (regions)CDM risk indicator Mapping 2: CDM projectsAbatement potential & price Country Sector Technology Transaction costs Investment volume (?)

13 Linkages to other WP WP 1: Investment risk Composite indicator (CPI)  Transformation to risk premium scale WP 5: JI and ET in Eastern Europe Emissions data WP 3: Permit supply - MAC curves by region and sector w/wo transaction costs - Technology transfer: Step 2 and 3 WP 2: Technology transfer Case studies: Real world experience

14 Good luck Oranje! Presentation for Project Meeting, Amsterdam, June 21, 2006

15 Annex

16 Partial Equilibrium: The Model  SIMAC : SImulation Model based on Marginal Abatement Costs  Böhringer et al. (2005)  Numerical multi-country partial equilibrium model of the (world) carbon market in 2010 and 2020  Objective: Minimization of compliance (abatement) costs by emissions trading  Model may covers transaction costs and investment risk for CDM projects  Based on (calibrated) marginal abatement cost functions for energy-intensive and non-energy-intensive sectors  EU-ETS  MACs can be based on bottom-up (e.g. POLES energy system model) or top-down model (e.g. PACE – CGE model)

17 General Equilibrium: The Model PACE –Multi-sector, multi-region model of the EU (updated data base: GTAP 6) –Incorporation of market interactions and income closures –Micro-consistent calibration based on empirical data for technologies and consumer preferences PACE (Policy Assessment based on Computable Equilibrium):

18 Regions and Sectors - PACE

19 Channels of international technology transfer 1.TT through foreign direct investment – Channels: imitation effects, labor turnover and vertical linkages of firms (Saggi 2000) 2.TT as international knowledge spillovers by international capital flows  induced technological change (Kemfert 2002) 3. TT as knowledge transfer through trade in goods (Grossman and Helpman 1991)  “Embodiment hypothesis”: technology is embodied in commodities  knowledge is transferred through trade a)Knowledge spillovers embodied in final goods (Das 2000) b)Knowledge spillovers embodied in intermediate inputs (Das 2002)