Modelling the Trade Implications of Climate Mitigation Policy International carbon pricing and trade flows
JULY 2013 RIRDC Publication No. 12/104
Modelling the Trade Implications of Climate Mitigation Policy International carbon pricing and trade flows
by Tingsong Jiang, David Pearce, Catherine Tulloh and Lauren Retief
July 2013 RIRDC Publication No. 12/104 RIRDC Project No. PRJ-006649
© 2013 Rural Industries Research and Development Corporation. All rights reserved.
ISBN 978-1-74254-446-5 ISSN 1440-6845 Trade Implications of Climate Policy: International carbon pricing and trade flows Publication No. 12/104 Project No. PRJ-006649 The information contained in this publication is intended for general use to assist public knowledge and discussion and to help improve the development of sustainable regions. You must not rely on any information contained in this publication without taking specialist advice relevant to your particular circumstances. While reasonable care has been taken in preparing this publication to ensure that information is true and correct, the Commonwealth of Australia gives no assurance as to the accuracy of any information in this publication. The Commonwealth of Australia, the Rural Industries Research and Development Corporation (RIRDC), the authors or contributors expressly disclaim, to the maximum extent permitted by law, all responsibility and liability to any person, arising directly or indirectly from any act or omission, or for any consequences of any such act or omission, made in reliance on the contents of this publication, whether or not caused by any negligence on the part of the Commonwealth of Australia, RIRDC, the authors or contributors. The Commonwealth of Australia does not necessarily endorse the views in this publication. This publication is copyright. Apart from any use as permitted under the Copyright Act 1968, all other rights are reserved. However, wide dissemination is encouraged. Requests and inquiries concerning reproduction and rights should be addressed to the RIRDC Publications Manager on phone 02 6271 4165. Researcher Contact Details David Pearce GPO Box 2203 Canberra ACT Email:
[email protected]
In submitting this report, the researcher has agreed to RIRDC publishing this material in its edited form. RIRDC Contact Details Rural Industries Research and Development Corporation Level 2, 15 National Circuit BARTON ACT 2600 PO Box 4776 KINGSTON ACT 2604 Phone: Fax: Email: Web:
02 6271 4100 02 6271 4199
[email protected]. http://www.rirdc.gov.au
Electronically published by RIRDC in July 2013 Print-on-demand by Union Offset Printing, Canberra at www.rirdc.gov.au or phone 1300 634 313
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Foreword Climate mitigation policy, both in Australia and overseas, is one of the more complex policy areas to evolve in recent years. The introduction of a ‘carbon price’ within the Australian economy has led to debate, especially regarding costs, benefits and indirect effects. This research addresses one aspect of this issue: the potential economic implications of mitigation policies for agricultural trade. This is important given the complexity of the economic interactions involved. Also, the modelling framework applied in this research provides a useful tool for understanding the potential trade implications of climate mitigation policies applied domestically, as well as by trading partners. One of the key findings of the research is the extent to which economywide interactions within a particular economy will have a major influence on trade outcomes. In particular, many of the economywide effects of climate policy (reduced real wages and changed real exchange rates) can more than mitigate some of the otherwise adverse trade consequences for the agricultural sector. This report is an addition to RIRDC’s diverse range of over 2000 research publications and it forms part of our Global Challenges R&D program, which aims to collectively addresses challenges, whether impediments or opportunities, to improve the profitability and sustainability of Australian agriculture. Most of RIRDC’s publications are available for viewing, free downloading or purchasing online at www.rirdc.gov.au. Purchases can also be made by phoning 1300 634 313.
Craig Burns Managing Director Rural Industries Research and Development Corporation
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About the Authors Tingsong Jiang is a Director at the Centre for International Economics (CIE) an applied economics research and consultancy firm. He is a specialist in global economic modelling and has used a range of models to address emerging global issues. David Pearce is Executive Director at the CIE. His work has a particular focus on climate policy related issues and he has undertaken analyses for a wide variety of government and private organisations. Catherine Tulloh and Lauren Retief are both Senior Economists at the CIE and have in recent years applied their research skills to a diverse range of contemporary policy issues.
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Contents Foreword ............................................................................................................................................... iii About the Authors ................................................................................................................................ iv Executive Summary ............................................................................................................................. ix Introduction ........................................................................................................................................... 1 Objectives ............................................................................................................................................... 2 Methodology .......................................................................................................................................... 3 1.
Overview of climate policies in Australia and its trading partners .......................................... 4 Australian climate change policy...................................................................................................... 4 Policies in trading partner countries ................................................................................................. 6 General effects of climate change policy on agriculture ................................................................ 10 Impacts of carbon pricing ............................................................................................................... 12 Effect of carbon pricing on Australian agriculture ......................................................................... 12 Implications of biofuel policies ...................................................................................................... 15 Effects of border tax adjustments ................................................................................................... 17 Carbon labelling.............................................................................................................................. 17
3.
Qualitative framework ................................................................................................................ 18 How will mitigation policy influence trade outcomes? .................................................................. 18 Economywide carbon pricing ......................................................................................................... 20 Offsets ............................................................................................................................................. 21 Border tax adjustments ................................................................................................................... 21 Biofuel policies ............................................................................................................................... 22 Food miles....................................................................................................................................... 23
4.
Simulation framework ................................................................................................................ 24 Model revisions............................................................................................................................... 25 Baseline projections ........................................................................................................................ 26 Policy simulation and analysis ........................................................................................................ 26 Qualification ................................................................................................................................... 26
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5.
The simulated baseline ................................................................................................................ 27 Economic drivers ............................................................................................................................ 27 Energy efficiency assumptions ....................................................................................................... 28 Climate change policy assumptions ................................................................................................ 29 Carbon dioxide emissions in 2020 .................................................................................................. 29 International trade in 2020 .............................................................................................................. 33
6.
Simulated impact of global climate policies .............................................................................. 37 Modeling existing climate change policies..................................................................................... 37 Impacts of implementing the Copenhagen Accord targets ............................................................. 44
7.
Conclusions................................................................................................................................... 53 Links between climate policy and agricultural trade ...................................................................... 53 Issues for the sector to consider ...................................................................................................... 55
Appendix A: Climate change policy details ...................................................................................... 58 New Zealand ................................................................................................................................... 58 United States ................................................................................................................................... 59 Canada ............................................................................................................................................ 61 European Union .............................................................................................................................. 62 Japan ............................................................................................................................................... 63 China ............................................................................................................................................... 64 India ................................................................................................................................................ 64 Argentina ........................................................................................................................................ 65 Brazil ............................................................................................................................................... 66 Indonesia ......................................................................................................................................... 66 Thailand .......................................................................................................................................... 67 Malaysia .......................................................................................................................................... 67 References ............................................................................................................................................ 68
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Tables Table 2.1
Change in output in key sectors in Australia due to emissions trading, 2050, compared to reference case ............................................................................................... 12
Table 2.2
Change in output in key sectors in Australia due to the Clean Energy Future Policy, 2020 and 2050, compared to reference case...................................................................... 14
Table 3.1
Summary of impacts of climate change mitigation policies ............................................. 19
Table 4.1
Aggregation of regions and sectors of the RIRDC version of GTAP-E model ................ 25
Table 5.1
Growth assumption of key economic variables from 2004 to 2020 % ............................. 27
Table 5.2
Energy efficiency improvement for selected sectors % pa ............................................... 28
Table 5.3
Actual and projected greenhouse gas emissions in EU-27 by EEA .................................. 29
Table 5.4
Projected carbon dioxide emissions: 2004 and 2020 ........................................................ 30
Table 5.5
Share of Australia’s CO2 emissions by source: 2004 and 2020 ....................................... 33
Table 5.6
Regional exports and imports: 2004 and 2020 .................................................................. 34
Table 6.1
Sectoral output, consumption and trade for Australia ....................................................... 43
Table 6.2
Summary of Copenhagen targets and implemented shocks .............................................. 44
Table 6.3
Change in emissions and carbon price of implementing Copenhagen targets .................. 46
Table 6.4
Impact on sectoral output and household consumption in Australia ................................ 51
Table 6.5
Impact on exports and imports in Australia ...................................................................... 52
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Figures Figure 2.1
Changes in value added following the introduction of a carbon price relative to business as usual in 2020 .............................................................................................. 15
Figure 3.1
Interactions between climate change, climate policy and trade .................................... 18
Figure 5.1
Share in world carbon dioxide emissions: 2004 and 2020 ............................................ 31
Figure 5.2
Projected annual growth of real GDP and CO2 emissions from 2004 to 2020 ............. 32
Figure 5.3
Changes in terms of trade between 2004 and 2020 ....................................................... 35
Figure 5.4
Annual growth in Australia’s exports and imports ....................................................... 35
Figure 5.5
Composition of Australia’s exports............................................................................... 36
Figure 5.6
Composition of Australia’s imports .............................................................................. 36
Figure 6.1
Carbon dioxide price and changes in emissions for existing policies ........................... 38
Figure 6.2
Impact on real GDP of existing policies ....................................................................... 39
Figure 6.3
Equivalent variation of existing policies ....................................................................... 39
Figure 6.4
Impact on terms of trade of existing policies ................................................................ 40
Figure 6.5
Price impacts of existing policies .................................................................................. 40
Figure 6.6
Impact on domestic demand of existing policies .......................................................... 41
Figure 6.7
Impact on imports of existing policies .......................................................................... 42
Figure 6.8
Impact on exports of existing policies ........................................................................... 42
Figure 6.9
Impact on real GDP of implementing the Copenhagen targets ..................................... 47
Figure 6.10
Equivalent variation of implementing the Copenhagen targets ................................... 47
Figure 6.11
Impact on terms of trade of implementing Copenhagen targets.................................... 48
Figure 6.12
Impact on CPI of implementing Copenhagen targets .................................................... 49
Figure 6.13
Impact of implementing Copenhagen targets on Australia’s domestic demand ........... 49
Figure 6.14
Impact of implementing Copenhagen targets on imports .............................................. 50
Figure 6.15
Impact of implementing Copenhagen targets on exports .............................................. 50
Figure 7.1
Many interactions leading to trade implications ........................................................... 53
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Executive Summary What the report is about This report considers the potential agricultural trade implications of global policies introduced to reduce greenhouse gas emissions. The global policy landscape is complex, and it is important to be able to analyse potential implications of policy options for Australian agricultural industries. Who is the report targeted at? This report is targeted at individuals and organisations dealing with the design of climate policy from the agricultural perspective as well as those charged with managing strategic responses to policy developments, both nationally and internationally. Background Agriculture will be both directly and indirectly influenced by greenhouse gas mitigation policies. One of the channels of effect will be through changes in trade in agricultural products. As a highly trade exposed sector, Australian agriculture could stand to both gain and lose from the economic changes brought about by mitigation policies. As countries increasingly commit to greenhouse gas reduction targets, and as policies to that end are progressively implemented, the process of reducing emissions will itself result in a major economic transformation for the countries involved. At the very least, energy systems (based on carbon sources) will need to change. This will have flow-on implications for all sectors of the economy, including agriculture. Predicting the net impact of these factors is a challenging task. Because trade changes essentially involve economywide considerations within an economy as well as economywide comparisons between economies, one of the major tools for analysis is multi-country economywide modelling. Such modelling can help identify potential effects of emission mitigation policies on trade for Australian agriculture. Aims/objectives The purpose of this project is to analyse emerging climate policies in Australia and around the world with a view to understanding the trade implications of these policies — particularly for agricultural trade. A particular purpose of this project is to use quantitative analysis (supplemented with qualitative assessments as appropriate) to analyse the trade implications of climate policy. The resulting information will be useful for stakeholders and rural policy makers in both developing new policies and in planning for the implications of existing policies.
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Methods used There are three components to the methodology used for this report: •
a review of available literature on the implications of mitigation policy for agricultural trade;
•
a review of policies currently being adopted, or proposed, for major trading partners and competitor economies; and
•
quantitative analysis — using a global general equilibrium modelling framework — of the broad implications of current and proposed mitigation policies.
Results/key findings Greenhouse gas emission mitigation policies may directly and indirectly affect agricultural trade in many ways. Relative price changes between different economies will result in direct economic affects. Economywide interactions within an economy (that is, resource movements between sectors induced by changes in real wages and the real exchange rate) will also deliver direct affects. These two mechanisms typically interact to determine the impacts on Australian agriculture of mitigation policies including carbon pricing or related measures that induce costs of abatement within economies. The ways in which the core mechanisms combine are likely to vary depending on the specifics of the policies adopted to reduce emissions relative to the levels they would achieve in the absence of the policy interventions. The main analytical tool used here — a global economywide model — was used to represent the potential carbon price implications for the various targets proposed within the Copenhagen Accord1. While not able to fully represent the full range of policies, this approach indicates a few broad conclusions: 1. While carbon policies change relative prices between economies, the magnitude of these changes are composed of many elements and are difficult to predict in advance; 2. Initial changes in relative prices between economies are modified by intersectoral or economywide effects within economies. In particular, changes in real wages and the real exchange rate lead to resource movements between sectors within a particular economy, thus modifying some of the initial relative price differences between economies; 3. These economywide effects may offset the initial trade implications of carbon pricing; 4. The simulations presented here indicate that the net effect of international mitigation action is to increase exports of most Australian agricultural products (relative to the baseline or business as usual level of exports).
1 Since the Copenhagen UN climate change conference in 2009, further meetings have been held in Cancun,
Durban and Doha. However, the Cancun agreements and the Durban meetings did not result in any new pledges by individual countries to specific emission reductions. Quantitative targets under the second commitment period of the Kyoto Protocol agreed to at Doha have not been finalised, and will not incorporate all countries that made commitments under the Copenhagen Accord.
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Implications for relevant stakeholders: Results presented here provide some broad guidance about appropriate sectoral responses to climate policy outcomes. Several possibilities emerge: •
adjustment to a carbon price requires flexibility in domestic and international markets. Factors which inhibit adjustments, such as inflexibilities or constraints in factor or product markets are likely to both increase the cost of mitigation policy and reduce the offsetting benefits for the agricultural sector;
•
responses to mitigation policy could be profitably addressed towards identifying and working to remove such constraints;
•
the introduction of additional trade barriers along with core mitigation policies around the world could significantly increase the cost of mitigation policies;
•
less transparent mitigation policy mechanisms (those involving constraints that do not emerge as a clear price effect) may also increase the cost of mitigation and make the overall implications for agricultural trade considerably less certain.
Finally, the analysis undertaken in this report has led to the development of a modelling tool that will remain useful for ongoing analysis as the international policy situation continues to evolve.
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Introduction As international climate negotiations continue, countries are increasingly committing to achieving particular levels of domestic mitigation over time. Overall, global targets to keep climate change within 2 degrees have been proposed, with a range of countries making individual commitments to achieve a variety of mitigation targets. The process of reducing emissions will itself result in a major economic transformation for the countries involved. At the very least, energy systems (based on carbon sources) will need to change. This will have flow on implications for all sectors of the economy, including agriculture. These implications will arise on both the ‘supply’ and ‘demand’ sides of the economy. On the supply side, mitigation policies will change relative costs of production (including transport costs) which will create an impetus for changed production techniques and technologies. On the demand side, changed incomes and prices will lead to changed demands for a range of products — effectively a relative decrease in demand for carbon intensive products (that is, those covered by mitigation measures) and a relative increase in demand for less carbon intensive products. As a consequence, agriculture will be both directly and indirectly influenced by global greenhouse mitigation policies. One of the channels of effect will be through changes in trade in agricultural products. As a highly trade exposed sector, Australian agriculture could stand to both gain and to lose from the economic changes brought about by mitigation policy. The drivers of changed trade patterns resulting from carbon mitigation polices are complex. They depend on a range of factors including: •
the extent of mitigation targets within particular economies;
•
differences in the cost of emission reduction (the cost of abatement) between economies;
•
the nature of the particular policy instruments used to achieve the targeted reductions in emission;
•
the resulting (that is, after mitigation policies are in place) relative price changes (for commodities and factors of production) within a particular economy;
•
the resulting relative price changes (for commodities and factors of production) between economies; and
•
the relative flexibility of the agriculture sector (that is, its ability to respond to price changes) between different economies — either those undertaking the abatement, or those exporters with an ability to respond to changes in world prices.
Predicting the net impact of these various factors is a challenging task. Because trade changes essentially involve economywide considerations as well as economywide comparisons between economies, one of the major tools for analysis is multicountry economywide modelling. Such modelling can help estimate the magnitude of the different effects of emission mitigation policies on the trade prospects for Australian agriculture.
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Objectives The purpose of this project is to analyse emerging climate policies in Australia and around the world with a view to understanding the trade implications of these policies – particularly for agricultural trade. A particular purpose of this project is to use quantitative analysis (supplemented with qualitative assessments as appropriate) to evaluate the trade implications of climate policy. The resulting information will be useful for stakeholders and rural policy makers in both developing new policies and in planning for the implications of existing policies. In particular, the objectives of the project are to: •
collate and summarise emerging climate policies in Australia and in key trade partner and competitor countries (from the perspective of agricultural trade);
•
draw out the pathways by which emission mitigation policies will lead to changes in trade patterns;
•
understand the implications of mitigation policies for relative prices and costs, both within and between different economies;
•
analyse, using appropriate qualitative and quantitative frameworks, the implications of these relative price and cost changes for trade in key agricultural products; and
•
draw policy and strategic implications from the perspective of the rural sector.
2
Methodology There are three components to the methodology used for this report: •
a review of available literature on the implications of international mitigation policy for agricultural trade;
•
a review of policies currently being adopted, or proposed, for major trading partners and competitor economies;
•
quantitative analysis — using a global general equilibrium modelling framework — of the broad implications of current and proposed mitigation policies.
Details of the global model used in the report (the GTAP model), and the adjustments made to the model for this project, are set out in chapter 4. Because the trade implications of climate policy are essentially economywide in nature, the modelling framework chosen is a global ‘general equilibrium’ (or economywide) model. This means that the model covers not only agriculture (or broad agricultural sectors), but it also covers other sectors in the economy. This allows the interaction between sectors within an economy to be captured. Further, the model is multicountry, allowing it to capture interactions between economies. Because the implications of climate mitigation policy are likely to be of interest to the agricultural sector on an ongoing basis, we have chosen a modelling framework that is in the public domain. This means that a range of parties could make appropriate arrangements to access the model and conduct a range of ongoing experiments to consider the emerging implications of mitigation policy. The selection of models for economic analysis — particularly analysis that is as complex and uncertain as international climate policy — inevitably involves a range of trade-offs. Unfortunately, no model captures all features of the problems. The trade-offs made for this project are set out in more detail in the modelling chapters.
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1. Overview of climate policies in Australia and its trading partners In this section, the climate change mitigation policies in Australia and key trading partners are summarised. Focus is given to those policies that affect the agriculture sector in particular. Broader climate change policies are also listed as these policies can affect the wider economy including the price of inputs to the agriculture sector. Furthermore, most of the expected changes in trade patterns are likely to arise because changes in costs of production will differ between countries, changing relative prices. For that reason, it is important to understand climate change policy in Australia’s key competitors and trading partners as well as those policies implemented domestically.
Australian climate change policy Economywide policy Australia has in place an unconditional target of 5 per cent below 2000 levels by 2020. In addition, the government has announced further emission reduction targets of: •
between 5 and 25 per cent below 2000 levels by 2020 depending on the degree of international action taken; and
•
80 per cent below 2000 levels by 2050.
Recent discussion of Australia’s climate change policy has been dominated by an emissions trading scheme. In 2011 the government introduced the Clean Energy Legislative Package, the centrepiece of which is a carbon pricing mechanism2. The Clean Energy Legislative Package was introduced after the proposed Carbon Pollution Reduction Scheme (CPRS) was defeated in the Parliament in 2009. Some aspects of the new scheme are similar to the proposed CPRS, however, as discussed in the next chapter, the implications for the agriculture sector are significantly different. The carbon pricing mechanism under the Clean Energy Future package: •
commenced in July 2012;
•
will initially impose a fixed price on emissions (similar to a carbon tax), later shifting to a conventional cap and trade emissions trading scheme where the permit price is determined by market interactions;
•
the fixed price was initially set at $23/t CO2-e and will increase annually;
•
covers sectors including stationary energy, transport, industrial processes, fugitive emissions and emissions from non-legacy waste;
•
exempts agricultural and land sector emissions;
•
excludes the combustion of biomass, biofuels and biogas;
2
Full details of the Clean Energy Future Package are available at www.cleanenergyfuture.gov.au.
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•
effectively omits fuels used by motorists and light commercial vehicles and off-road use of transport fuels for businesses in the agricultural, forestry and fisheries industries; and
•
allows the use of international offsets, to a certain extent once the shift has been made to full emissions trading in 2015.
Assistance will be provided to approximately 40-50 per cent of ‘emission-intensive trade-exposed’ industrial activities such as steel, aluminium, cement and zinc manufacturing. The Clean Energy Package includes transitional assistance measures (free permits) for emission intensive and trade exposed sectors, starting at either 66 or 94.5 per cent depending on the emission intensity of the sector, and declining at a rate of 1.3 per cent a year. That is, more emissions-intensive, trade exposed industries would receive up to 94.5 per cent of the average carbon costs in the first year.
Agriculture policy As the on-farm agriculture sector has been excluded from the carbon pricing mechanism, a complementary policy has been introduced for farmers, foresters and landholders — the Carbon Farming Initiative (CFI). The Initiative establishes an offsets scheme that provides incentives for landholders to reduce carbon pollution. It establishes approved methodologies for generating offsets that are recognised as genuine and registered in a central registry. Offsets generated under the Initiative can be sold into the carbon pricing mechanism market as well as the voluntary market.
Other policies Other federal-level climate change policies include: •
a renewable energy target of at least 20 per cent by 2020;
•
formation of the Clean Energy Finance Corporation which invests in cleaner energy sources;
•
programs to support energy efficiency initiatives by businesses and industries; and
•
the Land Sector Package which includes the Biodiversity Fund, the Indigenous Carbon Farming Fund, the Regional Planning for Natural Resource Management Climate Change Fund and the Land Sector Carbon and Biodiversity Board.
The most significant state-based climate change program was the NSW Greenhouse Gas Reduction Scheme. It operated between 2003 and 2012 and was a mandatory scheme for electricity retailers in NSW and ACT under which they met emission benchmarks by using low emission electricity generation or undertaking abatement projects. The spot price reached a maximum of just under $15 in 2006, but the price collapsed with the introduction of a national carbon pricing mechanism (IPART 2012). Australia does not have a national biofuels target, but biofuels attract a tax offset that effectively nullifies the excise taxes that apply to other fuels. New South Wales has blending mandates of 6 per cent for ethanol and 2 per cent for biodiesel.
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Policies in trading partner countries The economies that have been selected for analysis in this report are New Zealand, United States, Canada, the EU, Japan, China, India, Argentina, Brazil, Indonesia, South Korea, Malaysia and Thailand. These economies cover Australia’s major agricultural export markets, the top agricultural exporters of Australia’s major export products, and the major economies of the world. The key climate change policies of these economies are summarised in table 1.1, further details of the policies in each country (including sources for ongoing information) is included in Appendix A. Table 1.1
Summary of climate change policies
Country New Zealand
Economywide policy
Agriculture policy
Other policies
Emissions trading started in 2008 and now covers all sectors except for agriculture.
At this stage agriculture is not included but may be in the future.
Aspirational renewable energy target of 90 per cent by 2025.
United States
A proposed emissions trading scheme that did not pass through the Senate, was to cover most sectors (not agriculture) and incorporate border adjustment taxes.
Agricultural offsets were to be eligible under the proposed emissions trading scheme.
State and regional emissions trading programs have been implemented or proposed. 20 states have emission targets, and 32 states are members of regional initiatives that collaborate on the development of a range of climate change policies.
Renewable fuel standard targets 36 billion gallons of biofuels by 2022.
California established a cap and trade scheme covering electricity and major industrial processes with the first compliance period starting in 2013.
The Regional Greenhouse Gas Initiative (RGGI) places a cap on CO2 emissions from the power sector across nine US states. Canada
Major policies (including any emissions trading scheme) will be aligned with US policy.
5 per cent biofuel content requirement for gasoline.
Regulation to limit emissions from coal fired power generation and passenger vehicles and light trucks. Some state based carbon taxes on combustion emissions (in British Columbia and Quebec). Quebec has established a cap and trade system that covers electricity and selected industrial sectors. Alberta has an emissions intensity target for large emitters, and if not met the emitter must pay $15/t CO2-e to a technology fund.
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EU
Japan
Emissions trading scheme covering most industrial sectors (not agriculture) operating since 2005.
Proposed emissions trading scheme has been put on hold.
Biofuels target of 10 per cent by 2020.
Renewable energy target of 20 per cent by 2020.
Farming emissions to be 10 per cent lower than 2005 levels by 2020.
Non ETS covered sectors to reduce emissions by 10 per cent compared to 2005 levels by 2020.
Proposed legislation for carbon stored in forests and farm land to count towards targets.
Some individual countries have implemented complementary policies to the EU ETS such as carbon taxes on fossil fuels.
-
Renewable Portfolio Standard for electricity retailers. Voluntary emissions trading scheme for large business energy use emissions and a trail ETS have closed.
Consumption of fossil fuel attracts a carbon tax of ¥289/tCO2 from October 2012. China
Research into the design of a national emissions trading scheme has started.
Cap and trade schemes operate in Tokyo, Saitama and Kyoto. Encouraging better agricultural practices.
Reduce emission intensity by 40-45 per cent.
Increase forestry cover by Energy conservation and efficiency in 40 per cent. the industrial sector. Seven provinces and cities have been selected as pilots to test emissions trading, the scheme in Shenzen started trading in June 2013.
India
-
5 per cent ethanol requirement in gasoline.
Increase renewable energy generation to 10 per cent by 2017.
Reforest 6 million hectares.
Energy intensity standards for industrial units and power stations and tradeable certificates Energy efficiency improvements for households and vehicles.
Argentina
-
Government assistance to Energy efficiency improvements. improve agricultural Support for wind farms. practices. Transport fuels need to be blended with biofuels. Tax and subsidy benefits for forestry activities.
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Brazil
-
Regulation of a proportion of sugarcane harvest to be done mechanically (rather than through burning).
Energy efficiency improvements. Increase renewable electricity generation.
Incentives for emission reducing agricultural practices. Biofuel target to increase ethanol consumption by 11 per cent a year to 2017. Providing technical assistance to other countries for ethanol production. Incentives to reduce deforestation. Indonesia
Aims to voluntarily reduce emissions by 26 per cent from BAU by 2020.
Forestry activities to stop illegal logging and increase plantation forestry, and incentives for forest protection.
Energy diversification and conservation efforts.
Encouraging low emission agricultural practices. Malaysia
-
5 per cent biodiesel mandate (in selected regions) but has not been met.
Incentives for renewable energy investments. Energy efficiency standards.
Efforts to plant trees and protect forests. Thailand
-
Favourable tax treatment for blended fuels.
Encourage energy efficiency and renewable energy sources.
Ethanol consumption target of 9 million litres/day by 2021 5 per cent biodiesel mandate. South Korea
Mandatory cap and trade program will start in 2015, design elements are being developed.
A range of other piecemeal policies are in place such as energy efficiency measures, encouraging increased renewable energy, and fuel switching.
Note: For more detail see the appendix.
As shown in the table, the only countries with comprehensive economywide policies in place are New Zealand and the EU, both with emissions trading. Most of the other developed economies have at some stage proposed emissions trading schemes but have faced political opposition (US, Japan, Canada). Some regional, state or provincial schemes have been introduced in countries without economywide policies (such as the US and Canada); however, none of these directly affect the agriculture sector. Policies directly affecting the agriculture sector are mostly biofuel policies. In New Zealand there is still a possibility that agriculture may be part of the emissions trading scheme, in other economies agriculture may potentially be included but only through offset programs. In
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developing countries there are incentive programs or government intentions to improve agricultural practices to lower emissions. Forestry is also a major focus of developing countries — with incentive programs to try to limit deforestation and increase reforestation. Remaining policies are mostly renewable energy targets, or incentive programs for renewable energy or energy efficiency.
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2. Literature on impacts of mitigation policy There are a growing number of studies on the potential impact of climate change on agricultural production and trade. There have also been some studies written on the implications of global climate change mitigation policies on production and trade in major economies and sectors. However, few of these focus on the agriculture sector. A number of studies look at the potential implications of specific types of policies such as biofuel policies and border tax adjustments. There are also a few reports on the implications of carbon labelling or food miles programs for agricultural products.
General effects of climate change policy on agriculture A number of studies provide a general discussion of the areas in which climate change policy may affect agriculture (see Anderson 2010a and b; Murphy et al. 2010; Huang et al. 2011; Tourney and Gueye 2009; and Thomson et al. 2010). The key points arising from these studies include the following. •
Policy responses to climate change are likely to have significant effects on global agricultural production and its location across regions but there are great uncertainties around possible government policy responses — both unilateral and multilateral — including what responses will be adopted where and when.
•
Where unilateral climate change mitigation is undertaken, concerns of leakage and competitiveness arise. These are potentially addressed through the use of border taxes, export rebates, or free permit allocations. The extent of leakage and competitiveness effects will depend on the type and size of the target, the sectors covered, the method of permit distribution, the flexibility of permit use and the extent offset credits are available.
•
Carbon pricing will increase the cost of inputs. Higher input costs may limit the ability to compete on international markets. Producers may also face barriers to trade if domestic carbon policy is less robust than other countries 3. However, where agricultural emissions are not regulated, barriers such as border tax adjustments are not expected to be imposed on agricultural products.
•
There are difficulties in implementing border tax adjustments on final consumer goods that have long production chains as information is required about the full production process to determine the carbon embodied in the product. Developing countries in particular are likely to see the information provision as a barrier to trade as they lack the capacity to gather that information. Alternatives to avoid this difficulty are to apply taxes only to primary products, or to apply a common tariff to all imports of a particular good based on the domestic emission intensity of production. This later option, however, does not allow for differentiation between efficient and less efficient producers.
•
WTO issues around climate change mitigation policies (in particular border adjustment policies) are raised as important concerns that need to be addressed. Border adjustments could face opposition on grounds of WTO rules because they are similar to import tariffs, or if they act as export subsidies. Policies that provide subsidies to agricultural producers for the use of best management practices or other mitigation technologies could also be the subject of challenges by
3 Clearly, harmonised national policies linked by an international carbon price would remove any
justification for introducing border tax adjustments.
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foreign competitors under WTO rules. It is suggested however that if the policies are part of a comprehensive environmental program then they would be consistent with trade rules. •
Mitigation potential in the agriculture sector could be exploited under domestic offsets schemes. Income generated from offsets would help farmers cope with increased costs of inputs expected under emission regulations including higher costs for fuel, fertiliser, chemicals transport and machinery. Physical and climatic conditions in other countries may be more suitable for generating offsets, such as growing trees.
•
Under a global climate change mitigation policy, developing countries are expected to be adversely affected because of the higher emission intensity of their production systems, particularly livestock. It is expected that there would be increased imports to Sub-Saharan Africa and reduced exports from South America. Decreased crop and livestock production is also expected from South America due to decreased deforestation and increased re-forestation driven by sequestration demand.
•
A global emissions price leads to a cessation of deforestation and an expansion of forested areas. The use of crops for bioenergy increases predominantly in South East Asia particularly if agricultural productivity growth is high. If, however, there is no agricultural productivity growth, the area under crops increases and there is widespread deforestation. Therefore both agricultural productivity improvements and specific incentives to reduce land use emissions (that is, a carbon price) are needed to reverse the deforestation trend.
•
Biofuel policies may encourage domestic biofuel production (through subsidies, tax benefits, import tariffs) or rely on imports to increase biofuel consumption. Developing countries, in particular Brazil, may have the opportunity to benefit from exporting biofuel products or inputs (for example, palm oil from Malaysia). A key implication of the biofuel policies are that food and energy product prices are closely linked. Areas of concern associated with the use of bioenergy include assessing the true lifecycle emissions associated with biofuel production, the cost effectiveness of biofuel subsidies, food price inflation and food security concerns. Increasing biofuel production on prime agricultural land would displace production of other agricultural products – reducing production and/or decreasing productivity.
•
Renewable energy targets are widely used (66 countries), targets in OECD countries are often supported by policies such as feed in tariffs, renewable portfolio standards, subsidies and rebates, and favourable tax treatment.
•
Mitigation in agriculture can generate co-benefits such as improvements in water quality and increased productivity of the land.
•
International trade of agricultural products can contribute to climate change through emissions associated with transport and distribution. Food miles labelling programs look to address these concerns and can affect the demand for imported agricultural products. These programs are voluntary and often implemented by supermarkets. Where full lifecycle emissions are not considered, these schemes can have adverse consequences. Using full lifecycle emission labels may reveal emission associated with food produced in Australia and New Zealand and consumed in Europe may have lower emissions than food produced and consumed in Europe. It was noted that food miles schemes are likely to grow and it is important that a common standard of calculating embedded carbon is used. Full carbon labelling schemes can provide opportunities to producers that adopt ‘greener’ methods, such as organic farming.
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Impacts of carbon pricing Ho et al. (2010) analysed the potential impact of the US acting unilaterally by applying a $10/t CO2-e tax on all emissions. They found that output from the US agriculture sector declined steadily over time to reach around 0.7 per cent below the base case in the long run. The most adversely affected industries were the gas industry, coal mining industry and petroleum refining (10, 8 and 5 per cent declines in output respectively). By contrast the services sector was projected to increase slightly compared to the base case. Mattoo et al (2009a) looked at the potential impacts of emissions trading on production in different sectors and regions of the world, including agriculture. Under each of the scenarios examined, global agricultural output declines relative to the base case, but by no more than 1 per cent. The greatest falls in production are expected in high income countries (particularly the US) while production in developing countries is expected to increase. Global agricultural exports, however, are expected to decline by a greater percentage, between 3 and 8 per cent depending on the scenario. Exports from the EU and Japan are expected to decline the most, while China, India and Russia are expected to increase agricultural exports.
Effect of carbon pricing on Australian agriculture The CPRS With the possible introduction of an emissions trading scheme in Australia in 2008 under the CPRS policy, several studies were conducted to assess the impact the scheme would have on the economy and specific sectors. The studies have been reviewed and updated based on the current policy, however, examining the results of the initial studies into the CPRS can give some insights into the possible impacts that the CPRS may have had if implemented. Furthermore, comparing the studies on the CPRS with those for the current policy can show the impacts of the policy settings that were changed. The Treasury (Australian Government 2008) considered the impacts of the CPRS under assumptions of gradual global climate change action (that is countries were assumed to adopt a carbon price equivalent to the price in Australia at different stages between 2013 and 2025). Table 2.1 summarises the projected impact of emissions trading on Australian output of agricultural and other key industries in 2050, compared with the reference case (or baseline) in which carbon pricing is not in place. Table 2.1
Change in output in key sectors in Australia due to emissions trading, 2050, compared to reference case CPRS -5
Sheep and cattle Dairy cattle Other animals Grains Other agriculture Meat products Other food Chemicals Electricity supply Refinery
-6.7 3.9 2.2 1.5 -0.2 -4.8 5.7 1.6 -12.8 -37.7
CPRS -15
Garnaut -10
Garnaut -25
Per cent change from reference case -10.2 -6.2 2.9 4.3 1.7 1.8 0.9 1.8 -1.0 0.3 -7.7 -4.5 5.1 6.2 3.8 2.2 -17.4 -13.6 -45.3 -35.0
-12.7 7.9 4.6 1.7 -2.4 -6.9 11.5 6.4 -18.1 -52.2
Source: Australian Government 2008.
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The table shows highly emission intensive industries (such as sheep and cattle, electricity supply and petroleum refining) are projected to produce less under emissions trading, however, output in other sectors is projected to be higher than under the reference case. Under the scenarios, Australia’s exchange rate is projected to fall, improving the competitiveness of Australia’s exports compared to the reference case. The fall is driven by decreased world demand for Australian energy products. A number of points need to be made about these findings: 1. Emissions from agricultural activities (in particular methane from livestock) were subject to carbon price in these simulations. This explains the reduction in output in livestock industries; 2. Non-livestock industries were expected to expand as a consequence of carbon pricing. This results from an economywide range of effects that are discussed in further detail in the modelling chapters of this report; 3. Some food based manufacturing industries were also projected to expand; 4. While the Treasury analysis did not report changes in agricultural trade, it is possible to infer from the published results that those industries with an increase in output also had an increase in exports. ABARE (Ford et al. 2009) also undertook modelling, focussing on the impact on the agriculture sector. They found that Australia’s share of agricultural world exports is relatively unchanged compared to the reference case because of the transitional assistance assumed to be provided to 2020. ABARE (Tulloh et al. 2009) and RIRDC (Jiang et al. 2009) also looked at the potential farm level impacts of the CPRS. Both reports looked at the direct and indirect costs of the CPRS on farmers. If agriculture were covered by the scheme, around 60 per cent of the costs of the CPRS are direct costs but this varies between agricultural industries (Jiang et al. 2009). Overall RIRDC estimated costs would increase by around 17 per cent with a permit price of $25/tCO2-e in the beef industry. Farm costs, excluding the purchase of permits, increase by around 1 to 2 per cent as a result of increased electricity, transport and chemicals costs (Jiang et al. 2009). ABARE (Tulloh et al. 2009) found similar results with input costs increasing by around 1 per cent with a carbon price of $28/t CO2-e and total costs increasing by up to 2.5 per cent where agriculture is covered but provided with transitional assistance.
The Clean Energy Future Package A number of studies have looked in detail at the Clean Energy Future package — particularly the official Treasury study of the analysis. Because direct agricultural emissions are not covered in the revised package, the sectoral results are quite different to those that were expected under the CPRS: overall the Treasury analysis predicts that the carbon price will lead to an expansion of agriculture relative to where it would otherwise have been. Agricultural output results are summarised in table 2.2.
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Table 2.2
Change in output in key sectors in Australia due to the Clean Energy Future Policy, 2020 and 2050, compared to reference case
Sheep and cattle Dairy cattle Other animals Grains Other agriculture Meat products Other food Chemicals Electricity supply Refinery
Clean Energy Future Clean Energy Future 2020 2050 Per cent change from reference case 0.3 0.5 0.2 2.3 0.5 2.5 0.6 1.2 0.2 1.4 0.2 1.3 0.1 2.4 1.8 -1.3 -3.2 -16.2 -0.2 -5.7
Source: Commonwealth of Australia 2011a
Several points can be made about these results: •
first, all agricultural activities are projected to expand in the presence of a carbon price (compared with the reference or business as usual case). In contrast with the CPRS, this expansion includes livestock based industries;
•
second, this expansion is not a consequence of the carbon farming initiative, as it is simulated separately in the Treasury analysis (and not part of the results presented here);
•
third, the expansion of agricultural activities is a consequence of economywide effects, essentially the change in the real exchange rate (depreciation) as a consequence of changes in more emissions intensive industries;
•
finally, while the Treasury analysis does not report changes in agricultural exports, it can be inferred from the published results that the industry expansions are also associated with an increase in exports.
The magnitude of the expansion in agriculture in the context of overall changes in the economy is summarised in Figure 2.1. This shows that the biggest reductions in activity are in the construction, mining and services sectors. The expansion in agriculture is very small by comparison, and is smaller than other expansions including manufacturing and renewables.
14
$ million in 2020 -7000
-6000
-5000
-4000
-3000
-2000
-1000
0
1000
2000
Manufacturing Agriculture
Transport
Electricity
Construction Utilities
Gains Mining
Mining
Services
Renewables
Losses
Trade Manufacturing
Data source: CIE estimates based on Commonwealth of Australia 2011b.
Figure 2.1 Changes in value added following the introduction of a carbon price relative to business as usual in 2020
Similar results to those prepared by Treasury were also found in a recent study for Meat and Livestock Australia (Meta Economics 2011). This study found that as a consequence of Australian carbon pricing, aggregate economywide exports would increase by 0.3 per cent (relative to the base case) in 2015 and by 0.7 per cent in 2030. Importantly, the analysis showed an increase in production of livestock industries following the introduction of the carbon price. Overall, the Meta Economics analysis shows a crucial difference between partial and general equilibrium modelling of the implications of the carbon price. Sector specific models that do not account for the economywide changes in real wages and the real exchange rate tend to overstate the negative impacts of the carbon price on sectors such as agriculture.
Implications of biofuel policies The US and Brazil together accounted for over 90 per cent of fuel ethanol production in 2008 (Timilsina and Shrestha 2010). Other significant producers include the EU, China and Canada. Production of biodiesel is small compared to ethanol, although increasing at a faster rate. The biggest producers are the EU and US. In recent years production has started in other regions such as Brazil, Indonesia, Malaysia and Argentina. Trade in biofuels is only around one tenth of the volume of production. The greatest trade was the import of ethanol by the US from Brazil. Brazil is the largest exporter of ethanol, supplying the US and EU markets. The second biggest exporter is China which exports to Japan, South Korea and other Asian countries. The EU is the largest importer of biodiesel and Malaysia and Indonesia are the main exporters. Trade in biofuels is subject to tariffs to protect domestic production, subsidies to domestic producers or regulatory measures on imported products (Timilsina and Shrestha 2010). Fridfinnson and Rude (2009) examined the implications of biofuel policies for trade patterns. Significant biofuel policies are in place in the US (renewable fuel mandates, tax policy and direct payments), EU (biofuel consumption tax targets, fuel tax exemptions) and Canada (mandated biofuel content of fuel supplies). Fridfinnson and Rude found that:
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•
The prices of feedstock commodities increased by up to 64 per cent as a result of the mentioned biofuel policies. The world price of corn increased by an average of 45 per cent between 2004 and 2015. The price adjustment in wheat was less than corn and vegetable oils, averaging 9 per cent over the projection period.
•
Higher grain prices benefit farmers through higher revenues but ethanol plants face smaller margins as prices increase. This finding is supported by observations that some ethanol plants in the US are closing down and planned constructions have been put on hold.
•
Feed expenditures for livestock producers in Canada were projected to increase by around 28 per cent leading to livestock production declines and increases in domestic livestock prices. However, livestock producers that use grain by-products (such as distiller’s grain) benefit from greater supply and, therefore, lower prices.
•
Coarse grain exports from the US decline significantly as a large volume is directed towards biofuel production. Exports of beef, veal and live animals also decrease. Exports of oilseeds and wheat also fall as producers switch production to corn.
•
In the EU exports of coarse grains, beef and vegetable oils decline but overall oilseeds trade is relatively unaffected. Similar patterns are expected for Canada.
Banse et al. (2012) looked at the impact of global biofuel mandates on land use, food production, GHG balance, trade and agricultural commodity prices. The mandates included in the analysis were those that have been introduced in EU, US, Canada, Brazil, India, Argentina, Colombia, Paraguay, Ecuador, South Africa, Indonesia, Thailand and Philippines, and the voluntary targets in Australia, China and Japan. Findings of Banse et al. included the following. •
The world price of crops is expected to be 15 per cent higher in 2020 with biofuel policies in place, compared to a scenario without biofuel policies. The price of biofuel crops would be 25 per cent higher and grains around 35 per cent higher. The price of crude oil would be around 15 per cent lower.
•
Exports of agricultural products is higher under the biofuel policies in all regions compared to the scenario without the biofuel policies.
•
All regions experience an increase in agricultural output, particularly in the EU and US where biofuel crop production increases by 17 per cent with the introduction of their biofuel mandates. Total agricultural production increases by much less than the production of biofuel crops, indicating a much lower rate of growth (or a decline in production) of non-biofuel crops.
•
Land use for pasture declines in all regions and arable land use increases significantly to satisfy the biofuel mandates in all regions. The increase in agricultural land use leads to a net increase in greenhouse gas emissions with the introduction of biofuel policies.
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Effects of border tax adjustments Mattoo et al. (2009b) state that even when emission reductions are only adopted in developed countries, emission leakage will be low. Despite this, developed countries (particularly the US) have scoped border tax adjustment options for competitiveness reasons rather than environmental reasons 4. Without border tax adjustments, emission reductions in the EU and US lead to declines in production manufactured goods of 5 and 12 per cent respectively. Exports from Brazil, China and India increase by around 6–8 per cent and production increases 1–2 per cent. Three different border tax arrangements were analysed: border taxes based on the emission intensity of the importing (domestic) country, taxes based on the emission intensity of the exporting country and equivalent import and export adjustments based on the intensity of the importing (domestic) country. Using border tax adjustments based on the carbon content of the imports would have the largest affect on developing countries — equivalent to tariffs in the order of 20–26 per cent on manufactured goods. Applying a tax refund for exports would further affect the trade patterns but would be the most economically efficient option. Under this efficient scenario, output of agriculture in developed countries declines by 0.6 per cent and exports decline by 1.9 per cent. Exports in developing countries decline by 2.6 per cent. Gros (2009) found that where there is no or insufficient pricing of carbon abroad, a carbon import tariff increases welfare in the importing country and globally. Manders and Veenendaal (2008) looked at border tax adjustments from the point of view of emission intensive industries in the EU. They found that a border tax adjustment arrangement would reduce the loss in competitiveness of these industries and therefore the production and employment impacts of the EU ETS would be lower. However, the overall impact was judged to be too small to make implementation worthwhile. By contrast, other authors recommended the use of border tax adjustments to prevent carbon leakage and improve employment and environmental outcomes (Gros 2009).
Carbon labelling Hogan and Thorpe (2009) provide an in depth discussion of food miles and carbon labelling programs. They conclude that food miles campaigns (where consumers are encouraged to make food purchase decisions by regarding the energy use in transporting the products) are misleading and could potentially distort international trade markets. In particular, market access for Australian agricultural exports could be reduced. Empirical evidence exists that shows carbon emissions in the food supply chain can be lower for products that are transported further because of more efficient and less carbon intensive production systems (for example lamb and dairy products from New Zealand compared to the UK, see Saunders et al. 2009). An example of carbon labelling is a label developed by the Carbon Trust in the UK. Companies display the label on their products after agreeing to undertake a carbon audit and reduce emissions. The calculations behind the label are supported by standards developed by the British Standards Institute. Work is underway to establish an international standard and also a simplified low cost standard. Hogan and Thorpe find that these non-price measures may lower the cost of shifting to a low carbon economy but the success will depend on consumer perceptions of the reliability of information and access to information where programs are voluntary. The benefits of the programs need to be compared to the cost of implementing and complying with standards.
4 More recently, with the failure of the US emissions trading policy, there has been less interest in the use of
border tax adjustments as a means to combat competitiveness concerns.
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3. Qualitative framework How will mitigation policy influence trade outcomes? There are a number of mechanisms through which both climate change and emissions mitigation policies interact with agricultural production and trade. Figure 3.1 illustrates some of these mechanisms.
Climate change policies
Climate change impacts
Changing production costs Changing climates Agricultural production
Changing competitiveness and border adjustments
Agricultural trade
Agricultural emissions
Changing of location of production
Transport emissions
Source: The CIE.
Figure 3.1 Interactions between climate change, climate policy and trade
While it is well understood that climate change may change the nature and location of agricultural production (see, for example, Tulloh and Pearce 2011), in this report, the focus is on the links between climate change policy (and in particular emissions mitigation policy) and agricultural trade — that is, the shaded area in Figure 3.1. Some of the key channels through which emissions mitigation policy can affect agricultural trade production include: •
changing the cost of inputs to agriculture — particularly inputs that are directly or indirectly emissions intensive;
•
directly changing the cost of production by requiring particular mitigation actions;
•
providing opportunities to agricultural producers to sell carbon offsets;
•
creating demand for agricultural products for biofuels; and
•
changing final (consumer for processor) demands for agricultural products.
Many of these impacts will affect agricultural production volumes and costs within a country. The extent that the policies differ between countries will also drive changes in trade patterns. Changes in
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relative costs of production will affect the competitiveness of agricultural producers compared to their international competitors. Drawing on findings from the policy and literature reviews summarised in the previous two chapters, table 3.1 sets out the main types of climate change policies that have been implemented or are being considered and notes the likely ways the policy may affect agricultural production and therefore trade patterns. Generally speaking, climate change policies will alter the cost of production in different countries and may also alter demand patterns. These will shift the production patterns between countries, and therefore change trade flows. Table 3.1
Summary of impacts of climate change mitigation policies
Climate change mitigation policy
Likely impact on agricultural production
Economywide carbon price – including agriculture
Increase cost of production – directly and indirectly. Potential increased competition for land from afforestation activities.
Economywide carbon price – excluding agriculture
Offset programs
Border tax adjustments (used in conjunction with an economywide carbon price) Biofuel policies
Regulation of emissions from agriculture Food miles labelling
Likely impact on agricultural trade
Domestic producers less competitive in the world market – decreasing net exports 5. All other things equal, would cause a currency depreciation, which will dampen the impact by making exports cheaper on the world market. Increase cost of production – Domestic producers less indirectly through higher inputs competitive in the world market – costs. Potential increased decreasing net exports (see footnote competition for land from 6). afforestation activities. All other things equal, would cause a currency depreciation, which will dampen the impact by making exports cheaper on the world market. Provides another source of income Expect an increase in net exports, for farmers, a form of subsidy to but not if production switches production. This may depend on the towards forestry. type and price of offsets, it may also Offsets can potentially also be lead to a reduction in production as imported depending on the scheme farmers switch to forestry. design. Mitigates or lessens the impact of Decrease imports compared to a the economywide policy for situation without border exporters and import competing adjustments, and, depending on the producers. design, may increase exports. Creates increased demand, and Decrease exports (or increase therefore higher prices, for biofuel imports) of feedstocks and other feedstocks. Drives increased products. production of feedstocks and potentially decreased production of other products. Increases the cost of agricultural Decrease exports/increase imports. production. Increases demand for domestic Decrease imports, particularly from produce. distant trading partners.
Source: The CIE.
One important aspect of the effect of emissions mitigation policies on agricultural production and trade are the economywide interactions that take place between sectors within a particular economy.
5 All else equal, domestic competitors would be less competitive compared to countries that do not have a
comparable policy.
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Different sectors of the economy have different emissions intensities and are all likely to face different marginal costs of abatement. An economywide emissions constraint will therefore lead sectors to contract (all other things equal) at different rates 6. Contraction of large sectors will have a variety of economywide effects including releasing resources for use in other sectors that are either expanding on not contracting as rapidly. These economywide effects will come about through a change in a number of key prices within the economy including real wages and the real exchange rate.
Economywide carbon pricing
Probably the most discussed, and the most significant, of climate change mitigation policies are those that introduce an explicit carbon price into an economy. This can be done in the form of a carbon tax, emissions trading, or a combination of both. Emissions trading has been operating in the EU since 2005, a scheme has started in New Zealand, and they have been discussed or proposed in a number of other economies (such as the US, Canada and Japan). State level policies have been introduced in California and Quebec, and pilot programmes are being implemented in seven Chinese provinces. With an economywide carbon price in place, the price of many products in the economy increases (relative to business as usual). This includes key inputs to agricultural production such as fuel, fertilisers, chemicals and transport (all of which are directly or indirectly emissions intensive). Where the policy also covers the agriculture sector as an emitter (of carbon dioxide, nitrous oxide or methane), farmers will also face the direct cost of emissions arising from agricultural processes, such as enteric fermentation in livestock and nitrous oxide emissions in cropping systems. Therefore, an economywide carbon price will increase the cost of production for agricultural products. The extent of the cost increase will depend on: •
the stringency of the emissions cap, or the carbon tax rate;
•
how emission permits are distributed between sectors (in the case of emission trading);
•
which sectors are ‘covered’ (that is, explicitly required to reduce emissions) in the policy; and
•
what, if any, instruments are used to mitigate competitiveness concerns of industries.
Most of the implemented and proposed emissions trading schemes do not include the agriculture sector. A possible exception was the New Zealand scheme which has left open the possibility of including emissions from agricultural production. Where agriculture is excluded, the impacts come only through the increased cost of inputs in combination with the associated economywide impacts of the policy. It is expected that for countries that implement an emissions trading scheme, or other carbon pricing policy, domestic agricultural producers will be at a competitive disadvantage compared to producers in other countries that do not face carbon prices. Because of this, it is expected that a carbon price will lead to a decrease in agricultural exports, or an increase in imports for importing countries. However, studies conducted into the expected change in costs under the previously proposed CPRS estimated the change in costs to be limited to around 2 per cent when agricultural is not directly covered (Jiang et al. 2009 and Tulloh et al. 2009). The greatest effects will be felt in horticultural industries with greater use of emission intensive inputs — chemicals, fertilisers and fuel. Estimates of the impact of the proposed US scheme are similar (see Babcock 2009 and FAPRI 2010). 6
The ‘contraction’ referred to here should be understood relative to ‘business as usual’, that is, relative to the situation in which the emissions mitigation policy is not in place. This will not necessarily correspond to an absolute year on year contraction following the introduction of the policy.
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Offsets Where agriculture is not directly covered by an emissions trading scheme, offsets from the agriculture sector may be allowed. Eligible offsets allow farmers to earn extra income by altering production processes that reduce greenhouse gas emissions or sequester carbon. The income will depend on the prevailing carbon price and the cost of undertaking the abatement activity. Importantly, farmers are under no obligation to participate in offset markets, and therefore any farmer who chooses to participate should benefit. In Australia, such an offset scheme is implemented through the Carbon Farming Initiative. 7 The effect of offsets on agricultural production and trade are ambiguous. The opportunity to earn offset credits from agricultural activities may increase production levels. Alternatively, landholders may switch their focus from agricultural production to the offset market, for example by establishing forestry plantations to earn offsets. In this case agricultural production will decline, reducing net exports. Modelling of the Australian offsets scheme (the Carbon Farming Initiative) shows that, for Australia, the voluntary offsets scheme is unlikely to have a significant effect on the agriculture sector (Commonwealth of Australia 2011b). Offsets may also be traded internationally depending on the rules of the particular emissions trading scheme. The Clean Development Mechanism (CDM) — operating under the United Nations Framework Convention on Climate change — is one example of offsets that are generated overseas and may be used within a domestic scheme. 8 An alternative is if country schemes are linked together, or where credits are mutually recognised between individual country schemes. Under these circumstances offsets will be generated in the country with the lowest marginal cost of abatement. In agriculture, seasonal conditions may play a key role in determining the cost of abatement. Producers in one country may have a distinct advantage in generating offset credits. If this is the case, the impact on agricultural production and trade may be lessened in the country of the scheme but the impact could be felt in the offset producing countries.
Border tax adjustments Border tax adjustments have been considered in a number of countries as a way to deal with potential leakage and competitiveness impacts of an economywide carbon price 9. Border tax adjustments impose a charge on imports based on the emission intensity of the product. The aim of the policy is to ensure that imports from countries without carbon policies (or with less stringent carbon policies) incur a price equivalent to that charged on domestically produced products. Depending on how it is implemented, the charge can be based on the average emission intensity of domestic production of the same product, or on the emission intensity of the actual product as it was produced. The policy can also include a rebate of carbon charges on products exported. The border tax adjustment effectively removes any trade effects that the initial climate change policy may have had. It also goes further, to in effect, impose a carbon price on any imports to the country. This is expected to reduce imports of products to the country.
7
See http://www.climatechange.gov.au/cfi.
8
See http://cdm.unfccc.int/.
9 Recently the interest in using border tax adjustments appears to have declined with the failure of the US
emissions trading policy, however, they still remain a policy option for addressing competitiveness concerns associated with introducing carbon pricing before other countries.
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The actual effects will depend on how the adjustments are practically implemented, for example which carbon intensity is used, whether exports are given rebates, and which sectors or products are affected. If agriculture is not included in the emissions trading scheme then it is highly unlikely that agricultural products would be subject to border adjustment taxes. At this stage it appears unlikely that border tax adjustments will be applied to agricultural products. A major concern around the use of border tax adjustments is whether they would comply with WTO rules. Murphy et al. (2010) suggest that if border adjustment policies are part of a comprehensive environmental program then the taxes would be allowed, but it might not be until one country tries to impose border taxes, and these taxes are subject to a challenge, that the ultimate compliance is confirmed.
Biofuel policies The most common climate change policy implemented is renewable energy targets. Targets can be met through the use of renewable energy standards, feed in tariffs or other financial incentives. Most renewable energy policies are unlikely to have significant impacts on the agriculture sector, apart from possibly increasing the cost of electricity. However, renewable energy policies can also include biofuel policies which can have significant effects on the agriculture sector. Major biofuel policies have been introduced in the US, EU, Canada and Brazil. There are two main types of biofuel policies that have been introduced, those that require a certain percentage of fuels sold to be biofuels (ethanol or biodiesel) and those that provide significant financial assistance and protection for the domestic production of biofuels. Both result in an increased demand for biofuel feedstocks — mostly corn, wheat, sugar, palm oil and oilseeds. This has the effect of increasing production, not just in the country of the policy but worldwide. Production of other agricultural products also declines as land is shifted into the production of feedstocks. Exports of feedstock commodities decrease in the country with the biofuel policies, and potentially import feedstocks. In other countries, opportunities to export these products may increase — either to the biofuel producing country or to other countries as supply from countries with biofuel policies decreases. The price of the feedstock commodities is driven up by biofuel policies. Some of the flow on impacts include: •
increased income for feedstock producers;
•
higher feed costs for livestock producers that use the grains as feed. Significant increases in feed grains decreases the production of livestock products that rely on those grains; and
•
increased supply of distiller’s grain, a byproduct of biofuels production. Some livestock producers, such as cattle farmers, use distiller’s grain as a feed. Cattle farmers therefore would face less of a cost increase than say pork producers who do not use distiller’s grains (Fridfinnson and Rude 2009).
The profitability of biofuels production depends on the price of feedstocks and the price of oil. As oil prices increase biofuels become more profitable and therefore the price of feedstocks increases. Accordingly, recent crop prices and energy price movements have been closely linked as a result of biofuel policies.
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Food miles While technically not a government climate change policy, food mile labelling can potentially have significant effects on agricultural trade. Regulation of these labelling systems will be an important future role for government policy. Food miles labels are labels which provide consumers with an indication of the distance the food product has been transported, intended as a way to inform consumers about the emissions that might be associated with transporting food. Food mile labels would be expected to reduce consumption of food products that are imported and increase consumption of domestically produced products. Depending on the level of detail provided on the label, the effect may be greater for products that are transported larger distances. If these types of labels become widespread, regulation of emission related labelling will be required to prevent perverse outcomes. Studies have shown that total lifecycle emissions from the production of a food product can differ substantially between countries and that difference can outweigh emissions associated with transport. The result is that total emissions from the production and transport of a product may be lower where the product is sourced from a more efficient but distant location. Further development of these types of labels are required to ensure consumers are provided with information about the total lifecycle emissions associated with products rather than simply the distance they are transported. With more accurate labelling systems, demand for goods from countries that have production systems with low emission intensities, such as Africa, New Zealand and Australia, will increase and demand from high emission sources will decline.
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4. Simulation framework This study uses the Energy-Environment version of the GTAP (GTAP-E) model (Burniaux and Truong 2002; McDougall and Golub 2007) to simulate the impact of various climate change policies on international trade in agricultural products. The GTAP suite of models and associated databases are compiled and made publically available through a consortium of researchers centered around the Centre for Global Trade Analysis at Purdue University (see www.gtap.org for full details). A major advantage in the use of the GTAP model is that it is in the public domain and has been used by a wide variety of researchers. This means that future research can easily build on the foundations laid in this report. Compared to the original GTAP model (Hertel 1997), GTAP-E implements a different production nesting. It introduces a capital-energy bundle in the value added inputs of production. The energy part of the bundle is a combination of electricity and non-electricity inputs which is in turn a combination of coal and non-coal fuels (oil, gas and petroleum products). This production structure allows fuel substitution in electricity generation. The GTAP-E model can model a carbon tax in one or a number of economies and calculates the changes in carbon dioxide (CO2) emissions 10. Alternatively, it can set an emission reduction target for one or a number of economies and works out the required carbon tax rate. In the latter case, it essentially models a cap and trade or emissions trading scheme (ETS). The calculated carbon tax rate is the permit price. In modelling the ETS, GTAP-E allows the trading to happen in a bloc or several blocs of economies. A bloc can be any combinations of economies, from a single economy to all economies in the world. The modelling work of this study involved the following four major tasks: •
revising the existing GTAP-E model;
•
producing a business as usual (BAU) baseline projection;
•
conducting policy simulations; and
•
analysing the simulation results.
These tasks are discussed in more detail below.
10 The GTAP-E model only covers CO2 and no other greenhouse gases. Agriculture is a major source of
methane and nitrous oxide. This is noted as a limitation of the GTAP-E model, however, the agriculture sector is not a covered sector in the policies that have been introduced (and the policies modelled). Therefore, the limited greenhouse gas coverage of the model is not expected to have a material effect on the results. Importantly, as the International Energy Agency recently pointed out, the energy sector is by far the largest source of greenhouse gas emissions, and most of these are CO2 (IEA 2013).The major initial impacts of the modelled climate change policies on the agriculture sector are expected to be realised through changes in prices faced by the agriculture sector for inputs and the factors of production.
24
Model revisions In order to carry out the simulations required for this study, both the code and database of the original GTAP-E model were revised. Some additional model features were required for this report. For example, agricultural sectors are often not directly covered by a climate change policy — as in the Australian case — while the original GTAP-E assumes uniform carbon tax for all sectors. It was therefore necessary to introduce some flexibility in the model to allow different coverage of sectors. The existing GTAP-E model uses versions 5 and 6 of the GTAP database (Dimaranan and McDougall 2002, Dimaranan 2006) and associated CO2 emissions databases (Lee 2002, 2007). Ludena (2007) developed a facility to process the CO2 emissions database into a format suitable for aggregation with the main GTAP 6 database. Unlike the previous versions of CO2 emissions data, the CO2 emissions data for GTAP Version 7 database (Lee 2008) does not identify the sources of energy commodities whose use by industries and households emits CO2. In order to use the facility provided by Ludena (2007), we have split emissions according to the value of energy commodities by source as reflected in the GTAP 7 database. To provide a model suitable for practical simulations analysis, the underlying databases were then aggregated into 20 country groups and 20 broad sectors (see Table 4.1). The classification of countries and regions places the focus on Australia’s major trading partners and competitors, while that of sectors maintains the details of agricultural sectors available in the underlying GTAP database. Table 4.1
Aggregation of regions and sectors of the RIRDC version of GTAP-E model
Countries
Commodities
Australia
Sugar cane/sugar beet
New Zealand
Oilseeds
European Union (27 nations)
Rice
United States
Wheat
China
Other grains and crops
India
Cattle/sheep/goats/horses
Japan
Other livestock
South Korea
Fishing/forestry
Canada
Coal
Russia
Oil
Argentina
Gas
Brazil
Other minerals
Indonesia
Processed meat
Malaysia
Processed food
Thailand
Manufacturing
Rest of Europe
Petroleum/coal products
Southeast Asia
Electricity
Rest of South America
Utilities/construction
Africa
Transport/communications
Rest of World (ROW)
Other Services
Source: The CIE.
25
Baseline projections The base year of the GTAP 7 database and associated CO2 emissions database is 2004. It is therefore necessary to update the database to a later year. The year 2020 is chosen as the year for the new baseline projection because most policies and country commitments set emissions reduction targets in that year. A baseline is a business as usual (BAU) case for the economies, that is, the development of the economies is driven by underlying long term economic drivers without any additional climate change policies. However, as one of the purposes of this study is to analyse the impacts of some existing climate change policies, these policies are not included in the baseline construction. These examples include the emission trading schemes in Australia, New Zealand and the European Union. Details of the baseline are provided in chapter 5.
Policy simulation and analysis Policy simulations are carried out by shocking relevant variables — carbon taxes and/or emissions reductions — relative to the constructed baseline. This generally involves the following three steps: •
formulating appropriate model ‘shocks’;
•
running the model with shocks in place; and
•
interpreting the simulation results.
In most cases, a climate change policy is modeled as a carbon tax or an emissions trading scheme (ETS) with permits being auctioned. Targeted or expected reductions in emissions are formulated as an exogenous shock while the permit price (carbon tax) adjusts to achieve the required reduction. This is based on an implicit assumption that governments seek to achieve policy targets with the cheapest measures, that is, economic instruments like carbon tax or permit trading. Simulation results are generally presented as percentage deviations from the baseline situation. For example, a 1 per cent reduction in real GDP in 2020 means the real GDP would be 1 per cent lower than the case where the concerned policy is not implemented. It does not mean the real GDP in 2020 will be 1 per cent lower than current levels. In fact, there will still be some growth over time, albeit the growth rate is lower than otherwise would be.
Qualification It should be noted that the GTAP-E model used for this study accounts for carbon dioxide emissions from energy uses only. In projecting the emissions and formulating the policy targets, it is assumed that CO2 emissions will grow at, and be cut by, the same rates as total greenhouse gas emissions. This is a simplifying assumption as it does not include the non-CO2 emissions from agriculture, especially methane emissions from cattle. In most cases this does not affect the result of the policy simulations because agriculture is generally excluded from climate change policies in most countries or regions.
26
5. The simulated baseline The base year of the GTAP 7 database is 2004. It is necessary to update the database to a later year. As most of the climate change policies are setting a target for 2020, we produce a baseline for that year. The baseline assumes a business as usual scenario, that is, no climate change policies in place.
Economic drivers The baseline for 2020 is generated using assumptions about key economic drivers such as population, labour force, capital and productivity improvements. The Center for Global Trade Analysis has compiled a database of these projections of key economic drivers by influential institutions in a format compatible with the main GTAP database (Chappuis and Walmsley 2011). This study uses relevant projections extracted from this database. Table 5.1 reports the growth assumption of these variables from 2004 to 2020. Table 5.1
Growth assumption of key economic variables from 2004 to 2020 % Population
Labour force Capital
Real GDP
Australia
28.6
22.1
52.8
47.6
New Zealand
20.0
23.8
39.4
42.1
China
9.3
7.6
281.9
297.2
Japan
0.6
-7.2
36.8
19.1
Korea
-9.9
10.2
79.8
61.5
Indonesia
19.8
29.2
151.0
133.3
Malaysia
31.7
33.6
145.1
96.6
Thailand
11.6
10.9
115.2
94.5
Southeast Asia
17.5
31.2
155.7
89.1
India
26.5
33.8
154.8
212.7
Canada
18.4
16.9
53.7
44.5
United States
17.0
14.1
40.0
36.7
Brazil
17.3
27.3
117.3
72.5
Argentina
16.9
29.8
124.5
78.3
Other Latin America
26.3
36.5
120.7
84.6
European Union
6.7
3.1
42.0
27.7
Rest of Europe
-0.3
-4.0
70.3
35.7
Africa
40.6
52.6
144.8
112.3
Russia
0.0
-4.3
130.3
69.7
Rest of World
31.3
33.7
112.0
83.5
Source
UN (2011)
CEPII (Fouré et al 2010)
Source: CIE formulation based on sources listed in the table
Total world population in 2020 is based on the projection by the United Nations Population Division (UN 2011). Assumptions about labour force, capital and real GDP growth are from CEPII (Fouré et al 2010). The CEPII projections are used mainly because they are publicly available and are sufficiently forward looking for the analysis here.
27
It is assumed that there will be no change in land and natural resource availability over the simulation period. In generating the baseline, productivity improvements in each country or region are endogenised to ensure the assumed GDP growth is achieved in 2020 (combined with the assumed primary factor growth).
Energy efficiency assumptions In addition to economic growth, the most important factor determining carbon emissions is energy efficiency. Following the assumptions of the Australian Commonwealth Treasury (Commonwealth of Australia 2011b, pp146-148), an economy-wide rate of improvement in energy efficiency of 0.5 per cent per year is adopted in this study, except for specific sectors listed in table 5.2. Table 5.2
Energy efficiency improvement for selected sectors % pa Electricity
Manufacturing
Transport
Australia
1.0
0.7
0.8
New Zealand
1.0
0.7
0.8
China
1.1
0.5
1.3
Japan
0.5
0.5
0.4
Korea
0.5
0.5
0.4
Indonesia
2.3
0.6
0.4
Malaysia
1.4
0.5
1.2
Thailand
1.4
0.5
1.2
Southeast Asia
1.4
0.5
1.2
India
1.8
0.6
1.3
Canada
1.0
0.7
0.8
United States
1.0
0.6
0.5
Brazil
1.3
0.5
1.0
Argentina
1.3
0.5
1.0
Other Latin America
1.3
0.5
1.0
European Union
0.3
0.6
0.4
Rest of Europe
0.2
0.5
0.7
Africa
1.2
0.5
0.7
Russia
0.2
0.5
0.7
Rest of World
1.3
0.5
1.0
Source: CIE formulation based on Commonwealth of Australia (2011b, pp146-148)
The assumptions about the energy efficiency improvement for electricity, manufacturing and transport sectors are formulated closely following the assumptions by the Treasury (Commonwealth of Australia 2011b, pp146-148). Because the classifications of regions, sectors and fuel types and/or technology in the GTAP-E model are different from those in the Treasury modelling report, this study averages the Treasury assumptions using relevant available weights such as output of sub-sectors.
28
Climate change policy assumptions As noted in the previous chapter, one purpose of this study is to analyse the impacts of some existing climate change policies. The newly constructed baseline should therefore exclude these policies. Specifically, the Clean Energy Future Package in Australia and New Zealand ETS are not built into the baseline, while some of the policies in the European Union are. Table 5.3 summarises estimated and projected greenhouse gas emissions in EU-27 as reported in a series of European Environment Agency (EEA) reports (EEA 2007, 2008, 2009, 2010, 2011). The emissions in the table are presented as percentage changes from the EU-27’s 1990 emission level. Table 5.3
Report year
Actual and projected greenhouse gas emissions in EU-27 by EEA Projected emissions in 2020
Actual emissions in the previous year
With existing measures
With additional measures
Percentage change from 1990 levels 2007
-7.7
-6
2008
-9.3
2009
-10.7
-6.4
-14.3
2010
-17.3
-14
-20
2011
-15.5
-19
-25
-12
Source: EEA (2007, p19; 2008, Figure 2.4, p18, Figure 3.7, p44; 2009, Figure 8.3, p92; 2010, p31-32; 2011, p54-55).
It was projected up to the 2009 report that total greenhouse gas emissions in EU-27 would be around 6 per cent below 1990 levels with existing measures. In the 2010 report, EEA projected that emissions in 2020 would be 14 per cent lower than 1990 levels with existing measures. This partly reflects the impact of some new measures implemented after 2009, and partly reflects the impact of economic downturn which can be seen from a dramatic reduction in emissions in 2009. Between 2006 and 2008, the annual reduction in total emissions was equivalent to about 1.5 percentage points of the 1990 level. But from 2008 to 2009, the reduction in emissions was equivalent to more than 6 percentage points – from 10.7 per cent below the 1990 level in 2008 to 17.3 per cent below the 1990 level in 2009. It is therefore determined that a 6 per cent reduction from 1990 levels by 2020 is built into the baseline projection for the EU-27. In other words, policies implemented before 2010 are reflected in the baseline, while those after will be treated as existing policies and simulated separately.
Carbon dioxide emissions in 2020 Table 5.4 reports the projected carbon dioxide emissions in 2020 and the annual growth rate from 2004 – the GTAP database base year — to 2020, and Figure 5.1 depicts the shares of individual countries and regions in world emissions in 2004 and 2020.
29
Table 5.4
Projected carbon dioxide emissions: 2004 and 2020 CO2 emissions (Mt CO2-e) 2004 (GTAP database base year)
2020
Annual growth (%)
353.7
395.5
0.70
34.6
35.2
0.11
China
4,471.9
8,964.7
4.44
Japan
1,095.6
1,161.4
0.37
Korea
400.5
538.5
1.87
Indonesia
357.4
644.5
3.75
Malaysia
145.0
237.7
3.14
Thailand
217.0
328.7
2.63
Southeast Asia
229.3
356.4
2.80
1,061.5
2,161.3
4.54
566.0
710.6
1.43
6,069.5
6,181.0
0.11
Brazil
298.0
468.0
2.86
Argentina
148.7
241.3
3.07
Other Latin America
558.9
896.9
3.00
3,967.1
4,131.9
0.25
Rest of Europe
555.7
714.3
1.58
Africa
902.3
1,621.4
3.73
Russia
1,552.5
2,507.4
3.04
Rest of World
3,010.9
4,731.6
2.87
Australia New Zealand
India Canada United States
European Union
Source: CIE estimates using GTAP-E
Developing countries and emerging economies in general are projected to have higher growth in carbon dioxide emissions than developed countries, with India, China and Indonesia being the top three fastest growing countries in emissions, and African countries as a whole being the number four. This is primarily caused by the higher economic growth assumptions for developing countries. Growing at 0.7 per cent per annum from 2004 to 2020, Australia appears to be on the top of developed economies in carbon dioxide emissions growth. The Treasury projected Australia’s emissions to grow by around 1 per cent per annum between 2000 and 2020 without a carbon price (Commonwealth of Australia 2011b, p48). Although the Treasury’s projections cover total greenhouse gas emissions including non-CO2 gases while this study covers CO2 only, the 0.3 percentage difference in projected emission growth between the two studies can be explained by the difference in assumed economic growth. In the Treasury modelling, real GDP is assumed to grow by 3 per cent per annum in 2010s (Commonwealth of Australia 2011b, Table B19, p155), while this study assumes an annual growth rate of around 2.5 per cent.
30
Australia New Zealand China Japan Korea Indonesia Malaysia Thailand Southeast Asia India Canada United States Brazil Argentina 2004
Other Latin America
2020
European Union Rest of Europe Africa Russia Rest of World 0
5
10
15
20
25
%
Data source: CIE estimates using GTAP-E.
Figure 5.1 Share in world carbon dioxide emissions: 2004 and 2020
China, the United States and the European Union are expected to remain the top three CO2 emitting economies in 2020, with their joint share in the world total emissions falling slightly from 55.8 per cent in 2004 to a little over 52 per cent in 2020. Another change will be that China is expected to replace the US to become the largest emitter. Despite rapid growth, India’s share in the world emissions will lift slightly from 4.1 per cent in 2004 to 5.8 per cent in 2020. Australia’s share is expected to slide further, from 1.4 per cent in 2004 to 1.1 per cent in 2020. This is a result of Australia’s lower than average growth in CO2 emissions.
31
Australia New Zealand China Japan Korea Indonesia Malaysia Thailand Southeast Asia India Canada United States Brazil Real GDP
Argentina Other Latin America
CO2 emissions
European Union Rest of Europe Africa Russia Rest of World 0
1
2
3
4
5
6
7
8
9
10
%
Data source: CIE estimates using GTAP-E.
Figure 5.2 Projected annual growth of real GDP and CO2 emissions from 2004 to 2020
Figure 5.2 compares the projected annual growth rates of real GDP (black bar) and CO2 emissions (red bar) for the twenty countries and regions. The difference between these two growth rates indicates the rate of reduction in carbon emission intensity. It is clear that the two fastest growing economies, China and India, will have the largest reductions in emission intensity. In fact, their announced emission intensity targets under the Copenhagen Accord will be fulfilled in this business as usual baseline. It is projected that the intensity in 2020 will be about 47 per cent lower than the 2005 level for China and about 33 per cent lower for India. By comparison, the emission intensity target is 40 to 45 per cent below 2005 level by 2020 for China and 20 to 25 per cent below for India (UNFCCC 2011b).
32
Table 5.5
Share of Australia’s CO2 emissions by source: 2004 and 2020 2004
2020
Production Electricity Transport and communications Agriculture Food processing Mining Other production
% 89.1 54.4 18.1 1.8 0.8 4.1 10.0
% 86.1 47.0 22.2 2.3 0.8 4.4 9.4
Consumption
10.9
13.9
Source: CIE estimates using GTAP-E.
Table 5.5 reports the share of Australia’s CO2 emissions by source in 2004 and 2020. Production remains the prominent source of emissions although its share is expected to fall from 89 per cent in 2004 to 86 per cent in 2020. Consequently, emissions from household consumption are expected to increase from 11 per cent to 14 per cent. This change reflects the fact that Australians will consume relatively more imports than domestically produced goods. The largest single source of production emissions is electricity generation which is expected to fall from 54.4 per cent in 2004 to 47 per cent in 2020 as a result of assumed energy efficiency improvement in the sector. The fall in electricity share is partly offset by the rise in the share of emissions from transport, agriculture and mining. The rising share of these sectors is consistent with the overall trend of relying relatively more on cheaper imports. For example, transport is usually nontradable, while fresh agricultural produce is less tradable and Australia’s bulk agricultural produce are competitive in the world market. As a result, they are to some degree immune from international competition and expected to grow.
International trade in 2020 Table 5.6 reports baseline values for regional exports and imports in 2004 and 2020. In general exports in Asian countries will have higher growth rates than imports from 2004 to 2020. By contrast, other countries except EU will see higher growth in imports than in exports. This presents a continuation of the trend from recent decades. With higher productivity improvements, the Asian economies are projected to be able to lower their export prices (relative to world prices) and so increase relative exports. At the same time, other countries’ exports are projected to become relatively more expensive. This can be seen from their changes in terms of trade depicted in Figure 5.3.
33
Table 5.6
Regional exports and imports: 2004 and 2020 Exports 2004
Australia New Zealand China Japan Korea Indonesia Malaysia Thailand Southeast Asia India Canada United States Brazil Argentina Other Latin America European Union Rest of Europe Africa Russia Rest of World
Imports
2020
Growth
2004US$ billion 108.7 128.2 27.7 31.8 826.3 2,461.3 655.7 820.6 308.9 481.7 87.5 175.1 154.9 282.2 121.2 222.5 263.5 503.3 104.2 260.5 327.8 399.9 1,088.9 1,398.2 114.9 170.0 39.1 54.2 208.0 315.9 4,184.9 5,105.0 362.8 441.9 291.8 504.4 204.9 289.8 1,007.8 1,393.2
% pa 1.04 0.86 7.06 1.41 2.82 4.43 3.82 3.87 4.13 5.90 1.25 1.57 2.48 2.07 2.65 1.25 1.24 3.48 2.19 2.04
2004
2020
Growth
2004US$ billion 122.9 199.0 26.8 40.4 707.4 1,514.4 539.4 651.9 256.1 364.1 76.9 147.4 106.3 187.0 102.8 175.8 255.3 470.6 127.3 285.3 313.3 401.2 1,656.9 2,286.7 81.2 134.0 26.7 44.4 197.7 324.9 4,241.9 5,197.2 327.2 418.7 273.2 520.8 128.3 209.5 921.9 1,737.4
% pa 3.06 2.60 4.87 1.19 2.22 4.15 3.59 3.41 3.90 5.18 1.56 2.03 3.18 3.25 3.15 1.28 1.55 4.11 3.11 4.04
Note: Exports. Source: CIE estimates using GTAP-E.
All Asian countries are expected to have lower terms of trade in 2020 than in 2004, while the other countries except EU will see the opposite change. European Union’s terms of trade will not change and therefore its exports and imports will grow at the same rate. It is projected that Australia’s total exports will grow by 1 per cent per annum and imports by 3 per cent per annum between 2004 and 2020. Figure 5.4 reports growth rates of exports and imports by aggregated categories. Agriculture and mining, where Australia has a comparative advantage, are expected to have higher growth in exports than in imports. All other sectors including food processing are expected to have higher growth in imports than in exports. More prominently, other manufacturing exports will be falling due to competition from Asian countries. As a result, agricultural and mining shares in Australia’s total exports will each increase by 5-6 percentage points while the share of other manufacturing will fall by more than 10 percentage points (Figure 5.5). The composition of Australia’s imports in 2020 is expected to be roughly the same as in 2004 because other manufacturing products dominate total imports with a share of around 75 per cent (Figure 5.6).
34
Australia New Zealand China Japan Korea Indonesia Malaysia Thailand Southeast Asia India Canada United States Brazil Argentina Other Latin America European Union Rest of Europe Africa Russia Rest of World -30
-20
-10
0
10
20
30
40
%
Data source: CIE estimates using GTAP-E.
Figure 5.3 Changes in terms of trade between 2004 and 2020
Agriculture Mining Food processing Other manufacturing Petrol and coal products Exports
Imports
Transport and communications Other -2
-1
0
1
2 %
Data source: CIE estimates using GTAP-E.
Figure 5.4 Annual growth in Australia’s exports and imports
35
3
4
5
Agriculture Mining Food processing Other manufacturing Petrol and coal products Transport and communications
2004
Other
2020 0
5
10
15
20
25
30
35
40
70
80
%
Data source: CIE estimates using GTAP-E.
Figure 5.5 Composition of Australia’s exports
Agriculture Mining Food processing Other manufacturing Petrol and coal products Transport and communications
2004
Other
2020 0
10
20
30
40 %
Data source: CIE estimates using GTAP-E.
Figure 5.6 Composition of Australia’s imports
36
50
60
6. Simulated impact of global climate policies Modelling existing climate change policies As noted above, Australia, New Zealand and the European Union are the only three economies that have implemented economywide climate change policies at the time of writing. In the analysis below, these policies are considered first.
Measuring the policies Australia has set a target of unilaterally reducing its emissions by 5 per cent below the 2000 level by 2020. Australia’s carbon dioxide emissions in 2000 were 349.724 Mt CO2-e (UNFCCC 2011, Table 7, p17), a 5 per cent reduction means that allowed CO2 emissions in 2020 will be 332.238 Mt CO2-e. Compared to the projected baseline emissions of 395.45 Mt CO2-e, the required reduction in 2020 emission is 16 per cent (relative to baseline levels). The New Zealand Government estimated in its Fifth National Communication that total emissions excluding land use, land use change and forestry (LULUCF) in 2020 would be 85 828.9 Gg CO2-e “without measures” and 76 895.7 Gg CO2-e “with measures” (Ministry for the Environment 2009, Table 5.16, p103). The effect of the policy measures in 2020 is therefore a 10.4 per cent reduction in emissions from baseline projections. As noted in the previous chapter, climate change policies in EU-27 before 2010 have been built into the baseline with an effect of emissions reduction in 2020 equivalent to 6 per cent of 1990 levels. It was projected by EEA in 2010 and 2011 that emissions in 2020 would be between 14 and 19 per cent below the 1990 level with existing measures. Taking into account the impact of the current economic downturn in Europe, the analysis here assumes that existing policy measures bring emissions in 2020 to 15 per cent below 1990 levels. This implies that the effect of existing policies is a 9.6 per cent reduction in emissions from the baseline in 2020. Two scenarios are simulated 11 for these existing policies: each region achieving its own emissions target through its own unilateral actions; and the three regions forming a trading block (in emissions) to achieve the total emission cuts of the three regions in combination. Australia has plans to link its emissions trading scheme with the EU ETS from 2018 and is negotiating the link of the Australian and New Zealand schemes with the New Zealand government. This trading block simulates the linking of the three schemes as has been proposed.
Emissions and carbon price With the above existing climate change policies being implemented, the carbon emission tax or permit price in 2020 is expected to be A$19.2 per tonne of carbon dioxide equivalent (t CO2-e) in Australia, A$24.7/t CO2-e in New Zealand and A$18.9/t CO2-e in the European Union if no international emissions trading is allowed. If the emissions permits can be traded between these three regions, the carbon price is projected to be A$19/t CO2-e (left panel of Figure 6.1).
11 For the scenarios modelled, it is assumed that no offsets generated external to the trading block are used
(that includes Kyoto Protocol units such as CERs and ERUs).
37
25
Carbon price Australia
300 New Zealand
EU
200 100
20
Mt CO2-e
2004 AUD/t CO2-e
30
15 10
0 -100 -200 -300
5
Changes in em issions Other EU New Zealand Australia
-400
0
-500 Without international ETS
With international ETS
Without international ETS
With international ETS
Data source: GTAP-E simulations.
Figure 6.1 Carbon dioxide price and changes in emissions for existing policies
This carbon price pattern suggests that the impact of international emissions trading makes little difference because emissions in New Zealand are small, and the carbon prices in Australia and the EU are similar without an international ETS. There would be serious carbon leakage through the implementation of these existing policies also because there is no control in carbon emissions by other countries. As shown by the right panel of Figure 6.1, although total emissions in Australia, New Zealand and EU will be cut by 462 Mt CO2-e, emissions in other countries will increase by 220 Mt CO2-e, implying a leakage rate of over 47 per cent (here the leakage rate is defined as the increase in uncovered emissions relative to the reduction in covered emissions). The actual domestic reductions in emissions in the three economies do not differ significantly between individual action and the combined trading scheme. Domestic emissions would fall from 63.2 Mt to 62.7 Mt for Australia and from 3.7 Mt to 2.9 Mt for New Zealand, along with an increase from 395.6 Mt to 396.9 Mt for the EU.
Macroeconomic results Figure 6.2 reports the impact of these existing policies on real GDP in selected economies. The impact is measured as a percentage deviation from the baseline level for each economy. The three economies implementing carbon emissions control policies are all projected to have lower GDP than would otherwise have been the case, while other three economies (China, India and United States), are projected to have slightly higher GDP. An international ETS would make the loss in real GDP in the three economies smaller in Australia and New Zealand, while making a small difference for the EU. This is determined by their baseline level of emissions and the price differentials (between individual cuts and international ETS). For example, the price differential is the largest in New Zealand, and as a result the reduction in GDP loss is the biggest in percentage terms.
38
0.04 0.02 0.00 -0.02
%
-0.04 -0.06 -0.08 -0.10 -0.12 -0.14 -0.16
Without international ETS
-0.18 Australia
New Zealand
With international ETS
EU
China
India
USA
Data source: GTAP-E simulations.
Figure 6.2 Impact on real GDP of existing policies
0.10 0.05 0.00
%
-0.05 -0.10 -0.15 -0.20 -0.25 Without international ETS
-0.30
With international ETS
-0.35 Australia
New Zealand
EU
China
India
USA
a Equivalent variation (EV) is a measure of how much more money a consumer would pay before a price change to avert the price change. The EV in the chart is presented as a ratio to the baseline GDP level in each region. Data source: GTAP-E simulations.
Figure 6.3 Equivalent variation of existing policies
A similar pattern is evident for the impact on the equivalent variation (EV) as shown in Figure 6.3. EV is a summary economic welfare measure, in particular a measure of how much more a consumer would be prepared to pay before a price change in order to avert the impact of that price change. It is a measure used in the GTAP family of models to indicate the overall economic welfare change in an economy due to the implementation of particular policies. It is presented in the Figure 6.3 as a ratio to the baseline GDP level in 2020. It is estimated that Australia’s EV would fall by about 0.29 per cent of GDP in 2020, higher than the reduction of 0.15 per cent in real GDP. By contrast, the reduction in EV in New Zealand and EU is
39
closer to the reduction in their real GDP. This is due to a larger reduction in welfare associated with the terms of trade in Australia (Figure 6.4). 0.40 0.20 0.00
%
-0.20 -0.40 -0.60 -0.80
Without international ETS
With international ETS
-1.00 Australia
New Zealand
EU
China
India
USA
Data source: GTAP-E simulations.
Figure 6.4 Impact on terms of trade of existing policies
The deteriorating terms of trade in Australia is a result of the fall in domestic prices in Australia (Figure 6.5), which in turn is a result of lower domestic demand in Australia (Figure 6.6).
0.4
CPI
0.3 0.2
0.3
0.1
0.2
0.0
0.1
%
%
GDP deflator
-0.1 -0.2
0.0 Without international ETS With international ETS
-0.1 -0.2
-0.3
Without international ETS With international ETS
-0.4 -0.5
Australia
New Zealand
EU
Australia
Data source: GTAP-E simulations.
Figure 6.5 Price impacts of existing policies
40
New Zealand
EU
0.0
Interm ediate inputs
0.0 -0.1
-0.2
-0.1
-0.4
-0.2
-0.6
%
%
Consum ption
-0.2 -0.3
-0.8 Without international ETS With international ETS
-1.0 -1.2
-0.3
Without international ETS With international ETS
-0.4 -0.4
Australia
New Zealand
EU
Australia
New Zealand
EU
Data source: GTAP-E simulations.
Figure 6.6 Impact on domestic demand of existing policies
The projected fall in prices in Australia warrants more discussion as it appears to contradict the common perception that a carbon price will push up the general price level. It is true that a price on carbon will push up the supply cost of many products (by shifting the economywide supply curve upwards and to the left). At the same time, however, there is an offsetting effect on prices from the demand side — as a carbon price generally reduces production, ultimately leaving households with less income than would otherwise have been the case. This means the demand curve shift backwards (to the left) so that at any given price demand is lower. The level of the new equilibrium price depends on the relative magnitude of these two effects. If the cost effect from the supply side outweighs the price depressing effect from the demand side, the final price would rise, as in the case of New Zealand and the EU. In contrast, if the demand effect outweighs the cost effect, then prices will fall. This is the case for Australia in these simulations.
Impact on trade Figure 6.7 reports the impact of the existing climate change policies on aggregate imports in Australia, New Zealand, EU, China, India and USA in 2020. Consistent with the fall in real GDP and in welfare as measured by EV, Australia, New Zealand and EU demand fewer imports along with the decline in income (relative to baseline). Australia’s aggregate imports would fall by more than 1 per cent, the biggest among the three regions. By contrast, China, India and USA see increases in imports due to their relative increases in GDP, leading to higher import demand.
41
0.4 0.2 0.0
%
-0.2 -0.4 -0.6 -0.8 -1.0 Without international ETS
-1.2
With international ETS
-1.4 Australia
New Zealand
EU
China
India
USA
Data source: GTAP-E simulations.
Figure 6.7 Impact on imports of existing policies
Figure 6.8 reports the impact of the existing policies on aggregate exports in these regions in 2020. 2.0 1.5 Without international ETS
With international ETS
%
1.0 0.5 0.0 -0.5 -1.0 Australia
New Zealand
EU
China
India
USA
Data source: GTAP-E simulations.
Figure 6.8 Impact on exports of existing policies
Australia’s exports are expected to rise by 1.7 per cent in 2020 from the baseline level. Again this seems to contradict conventional wisdom, but is a consequence of domestic demand in Australia falling due to the carbon policy, outweighing the price pressure caused by the policy. As a result, its exports become relatively cheaper, leading to an increase. Aggregate exports in New Zealand are expected to fall by about 0.1 per cent in 2020 from the baseline level. This result is determined by opposite forces compared with the Australian case. Domestic prices are projected to be higher in New Zealand (as shown in Figure 6.5) because the price pressure effect from the supply side overweighs the forces for price reductions on the demand side. As a result, New Zealand products would become relatively more expensive, leading to lower exports.
42
The change in exports in the EU presents another interesting case. Although the domestic price in the EU is expected to rise for the same reason as in New Zealand, the magnitude of the price rise is smaller. The price rise in EU is smaller than that the effect on the average world price, which may be seen from its slightly deteriorating terms of trade. As a result, EU’s exports in 2020 are expected to rise by about 0.2 per cent from its baseline level. The other three regions where there are no climate change policies are expected to have lower exports than the baseline level because their domestic demand is projected to be higher.
Sectoral results for Australia Table 6.1 reports the impact of the existing policies on Australia’s sectoral output, consumption and international trade. They are all presented as percentage deviations from the baseline level in 2020. Table 6.1
Sectoral output, consumption and trade for Australia Output w/t w
Consumption w/t w
Exports w/t w
Imports w/t
w
Agriculture sugarcane oil seed rice wheat other crops cattle other livestock forestry and fishery
% 0.11 0.26 0.39 0.27 0.34 0.12 0.02 0.15 0.04
% 0.11 0.26 0.38 0.27 0.33 0.12 0.02 0.15 0.04
% -0.24 -0.17 -0.11 -0.16 -0.15 -0.15 -0.27 -0.34 -0.41
% -0.24 -0.17 -0.11 -0.16 -0.15 -0.14 -0.27 -0.34 -0.41
% 0.46 0.42 0.41 0.39 0.36 0.48 0.37 0.29 0.75
% 0.45 0.41 0.41 0.39 0.36 0.47 0.36 0.29 0.74
% -0.20 0.04 -0.07 0.24 0.14 -0.14 -0.24 -0.07 -0.39
% -0.20 0.04 -0.07 0.24 0.14 -0.14 -0.24 -0.07 -0.40
Food manufacturing Meat Other
0.30 0.40 0.27
0.29 0.40 0.27
-0.14 -0.22 -0.12
-0.14 -0.22 -0.12
1.74 2.00 1.65
1.73 1.98 1.64
-0.91 -0.96 -0.91
-0.91 -0.95 -0.90
Mining Other manufacturing Electricity Transport and communication Other services
-0.53 -0.72 -5.04 -0.39 -0.30
-0.52 -0.71 -4.99 -0.39 -0.30
-15.50 -15.35 -0.79 -0.79 -7.01 -6.94 -0.40 -0.39 -0.03 -0.03
2.97 0.48 n/a 1.26 3.12
2.95 0.50 n/a 1.24 3.09
-4.86 -1.06 24.18 -1.08 -1.74
-4.77 -1.05 23.87 -1.06 -1.73
Total
-0.39
-0.39
1.69
1.68
-1.25
-1.23
-0.34
-0.34
Note: “w/t”: without international ETS; “w”: with international ETS. Source: GTAP-E simulations.
Australia’s agricultural and food manufacturing sectors are expected to be positively affected by existing climate change policies. Although domestic demand for these products is expected to fall, export demand rises together with a fall in imports. The overall impact is a slight increase in sectoral production. This is primarily determined by the assumed policy coverage. Australia’s agricultural sectors are exempted from the ETS, boosting their competitiveness relative to other sectors within the economy. In addition, one of Australia’s major competitors, New Zealand, is simulated to include agriculture in its ETS, further boosting the competitiveness of Australian agricultural products in the world market.
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Impacts of implementing the Copenhagen Accord targets Measuring the Copenhagen Accord target Table 6.2 summarises the Copenhagen targets as compiled by the UNFCCC (2011a,b) and the corresponding shocks applied to the GTAP-E model 12. Table 6.2
Summary of Copenhagen targets and implemented shocks Reference Year Emissions Mt
Australia New Zealand China Japan Korea Indonesia Malaysia Thailand Southeast Asia India Canada United States Brazil Argentina Latin America EU-27 b
Rest of Europe Africa Russia Rest of the World
Target Low High % 20 a
2000 1990 2005 1990 BAU BAU
349.7 25.0 Intensity 1141.2
2005 2005 2005 BAU
Intensity 574.8 6104.8
20 17 17 36.1
1990
4395.7
20
1990
804.1
15.9
1990
2498.7
15
10 40 25 30 26
%
Allowance in 2020 Low High
Projected 2020 emission
Applied shock
Mt
Mt
Mt
%
25 279.8 20 22.5 45 25 855.9 30 26 Not specified Not specified
262.3 20.0
395.5 35.2
-29.3 -36.1
855.9
1161.4
-26.3 -30.0 -26.0
Not specified 25 17 477.1 477.1 17 5067.0 5067.0 38.9 Not specified
710.6 6181.0
-32.9 -18.0 -36.1
4131.9
-14.9
714.3
-5.4
2507.4
-15.3
Not specified 30 3516.5 3077.0 17.2 676.0 666.1 Not specified 25 2123.9 1874.0 Not specified
a
Australia noted a lower target of 5 per cent reduction from the 2000 level by 2020 in its Copenhagen target. However as this is a unilateral target, and it states that it would achieve 20 per cent reduction if there will be an international agreement in place, a lower target of 20 per cent reduction is modelled. b EU emissions level assumes intra-EU trade is taking place and so there is a uniform price across the EU. Note: Applied shocks are estimated using the lower Copenhagen targets. Source: CIE formulation based on UNFCCC (2011a,b,c).
There are three types of targets for the Copenhagen Accord. The first one is a specific or a range of reduction from the emissions level in a reference year by 2020. Most Annex 1 parties adopt this type of target. For example, Australia noted in its communication with the UNFCCC Secretariat that it will
12 Since the Copenhagen UN climate change conference in 2009, further meetings have been held in
Cancun, Durban and Doha. However, the Cancun agreements and the Durban meetings did not result in any new pledges by individual countries to specific emission reductions. Quantitative targets under the second commitment period of the Kyoto Protocol agreed to at Doha have not been finalised, and will not incorporate all countries that made commitments under the Copenhagen Accord.
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cut its emissions by 5 to 25 per cent from 2000 levels by 2020. Considering that the 5 per cent target is unilateral, and that it also stated that at least 20 per cent reduction would be achieved if there is an international agreement in place, this study uses 20 per cent reduction as the lower range of its Copenhagen target. Australia’s CO2 emissions in 2000 were 349.7 Mt (UNFCCC 2011c, Table 7, p17), and a 20 per cent reduction means allowed emissions for Australia in 2020 would be 279.8 Mt. Compared to the projected baseline emissions of 395.5 Mt in 2020, this target means a 29.3 per cent reduction from the baseline in 2020. The second type of target is a specific or a range of reduction from business as usual emissions. Brazil, Indonesia and Korea adopt this type of target. Modelling this type of target is simpler because it does not depend on baseline projection of emissions. The third type of target is concerned with emission intensity rather than a specific cut in emissions. China and India adopt this type of target. As discussed in the baseline projection chapter, both China and India would see their emissions intensity target as not binding by 2020. As shown in the last column of table 6.2, any binding targets are modeled as shocks to the emissions level in 2020. If a range of targets are identified, the lower bound is chosen (except for Australia), to reflect a conservative perspective on the Accord. Three scenarios are modeled: •
individual action: each region with a binding target acts separately to achieve its own target;
•
Annex 1 trading: Annex 1 parties form a trading bloc to achieve their joint target while other nonAnnex 1 parties with binding targets act separately; and
•
full trading: all the regions with binding targets form an emissions trading bloc to achieve their joint target.
Emissions and carbon prices Table 6.3 reports the impact on emissions and carbon price in 2020 of implementing the above Copenhagen targets under the three scenarios. If each region takes individual actions to achieve its own target, the carbon price in 2020 varies from A$12.9/t CO2-e for the Rest of the Europe to A$167.5/t CO2-e for Brazil. The carbon price in Australia is expected to be A$55.7/t CO2-e.
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Table 6.3
Change in emissions and carbon price of implementing Copenhagen targets Change in emissions Individual Annex 1 All action trading trading Mt
Mt
Mt
Australia New Zealand Japan Canada United States EU-27 Russia Rest of Europe Brazil Korea Indonesia China India Other
-115.7 -12.7 -305.6 -233.5 -1113.8 -615.2 -383.6 -38.4 -168.9 -161.6 -167.6 479.2 184.3 428.0
-89.7 -4.3 -131.8 -130.8 -1094.7 -563.0 -657.8 -146.5 -168.9 -161.6 -167.6 442.3 173.1 415.3
-96.4 -4.8 -149.4 -141.1 -1195.8 -619.9 -700.2 -157.5 -60.4 -72.5 -118.7 417.8 168.7 400.7
Leakage rate
-32.9%
-31.1%
-29.8%
Individual action
Carbon price Annex 1 trading
All trading
2004 AUD/t CO2-e 55.7 158.8 95.9 86.3 39.1 41.2 19.7 12.9 167.5 119.8 68.8
37.8 37.8 37.8 37.8 37.8 37.8 37.8 37.8 166.0 118.3 68.4
41.2 41.2 41.2 41.2 41.2 41.2 41.2 41.2 41.2 41.2 41.2
Source: GTAP-E simulations.
China, India and other regions without a binding carbon emission control policy are expected to have higher emissions, resulting in a carbon leakage rate of about 33 per cent. If Annex 1 countries form a trading bloc to achieve their targets jointly, the carbon price in the Annex 1 bloc is projected to drop to A$37.8/t CO2-e, while prices in other non-Annex 1 countries with binding targets would fall slightly. In this scenario, the carbon leakage rate is expected to fall to a little over 31 per cent. If all countries with a binding target form a trading bloc to achieve their targets jointly, the carbon price in these countries would be A$41.2/t CO2-e. In this scenario the carbon leakage rate is expected to fall further to under 30 per cent.
Macroeconomic impacts Figure 6.9 reports the impact of implementing the Copenhagen targets on real GDP in selected economies. The impact is measured as percentage deviation from the baseline level for each economy. The economies implementing carbon emissions control policies are all expected to have lower GDP than it would otherwise be the case, while other economies, such as China and India, are expected to have higher GDP. Australia’s real GDP is expected to fall by 0.5 per cent. Global GDP is expected to fall by less than 0.2 per cent.
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0.4
Individal action
Annex 1 trading
All trading
0.2
%
0.0 -0.2 -0.4 -0.6 -0.8 Australia
New Zealand
Japan
USA
EU
China
India
World
Data source: GTAP-E simulations.
Figure 6.9 Impact on real GDP of implementing the Copenhagen targets
An international ETS would generally make the impact on real GDP smaller. The GDP loss in Australia is expected to be reduced from 0.5 per cent to 0.3 per cent when Annex 1 countries form a trading bloc. There are exceptions to this, however, especially when the trading bloc is expanded from Annex 1 countries to all countries with binding targets. Although the loss in global GDP is expected to be smaller, in some countries such as Australia, New Zealand, Japan, USA and EU the individual GDP loss may be larger. This is mainly due to the existence of taxation related distortions which intersect with energy use in these countries. Figure 6.10 reports the welfare measure, EV, in selected economies. The measure is presented as percentage of the baseline GDP level in relevant economy.
0.8 0.6
% of baseline GDP
0.4 0.2 0.0 -0.2 -0.4 -0.6
Individal action
-0.8
Annex 1 trading
All trading
-1.0 -1.2 Australia
New Zealand
Japan
USA
EU
China
India
World
Data source: GTAP-E simulations.
Figure 6.10
Equivalent variation of implementing the Copenhagen targets
47
As discussed in the previous section, Australia’s welfare loss appears larger than its GDP loss due to the negative impact of carbon pricing on its terms of trade (1-1.1 per cent versus 0.3-0.5 per cent). As shown in Figure 6.11, Australia is expected to suffer a loss of about 4 per cent in terms of trade if implementing its Copenhagen target. 3.0 2.0 1.0
%
0.0 -1.0 -2.0
Individal action
-3.0
Annex 1 trading
All trading
-4.0 -5.0 Australia
New Zealand
Japan
USA
EU
China
India
Data source: GTAP-E simulations.
Figure 6.11 Impact on terms of trade of implementing Copenhagen targets
New Zealand, Japan, USA and EU are expected to improve their terms of trade from implementing their Copenhagen targets, leading to positive terms of trade contributions to their welfare. In these simulations, the positive effect of higher terms of trade in EU overweighs the negative impact of allocation efficiency losses from the carbon tax, resulting in a positive EV. For the other countries, the positive impact of terms of trade is smaller than the negative impact of allocation efficiency losses, leading to a negative EV. For the same reason discussed in the previous section, Australia’s overall price level is expected to fall after implementing the Copenhagen targets. As shown in Figure 6.12, consumer price index (CPI) in Australia would fall by about 0.2 per cent, while rising in other economies. Domestic demand in Australia is expected to fall (relative to baseline) after implementing the Copenhagen targets as a consequence of the reduction in GDP (relative to baseline). As shown in Figure 6.13, demand for domestic products is projected fall by 1.1 per cent for households, by 1.6 per cent for firms and by 0.2 per cent for governments in Australia (all relative to baseline) under the scenario of individual action. As a result, total domestic sales would fall by 1.3 per cent in Australia.
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3.0 Individal action
Annex 1 trading
All trading
2.5 2.0
%
1.5 1.0 0.5 0.0 -0.5 Australia
New Zealand
Japan
USA
EU
China
India
Data source: GTAP-E simulations.
Figure 6.12 Impact on CPI of implementing Copenhagen targets
0.0 -0.2 -0.4
%
-0.6 -0.8 -1.0 -1.2 -1.4 -1.6 Individal action
-1.8
Domestic sales
Annex 1 trading
Household
Firm
All trading
Government
Data source: GTAP-E simulations.
Figure 6.13 Impact of implementing Copenhagen targets on Australia’s domestic demand
Impact on trade The pattern of change in imports is similar to that for the existing policy settings discussed above. Countries with binding Copenhagen targets are projected to have lower imports except the EU. Because the EU is expected to be to have a relative increase in GDP, its demand for imports is higher. Australia’s imports are expected to fall by about 3 per cent. In contrast, countries without any binding targets, such as China and India, would see their imports increase (Figure 6.14).
49
4.0 3.0
Individal action
Annex 1 trading
All trading
2.0
%
1.0 0.0 -1.0 -2.0 -3.0 -4.0 -5.0 Australia
New Zealand
Japan
USA
EU
China
India
Data source: GTAP-E simulations.
Figure 6.14 Impact of implementing Copenhagen targets on imports
4.0 Individal action
3.0
Annex 1 trading
All trading
2.0
%
1.0 0.0 -1.0 -2.0 -3.0 Australia
New Zealand
Japan
USA
EU
China
India
Data source: GTAP-E simulations.
Figure 6.15 Impact of implementing Copenhagen targets on exports
Australia is again expected to increase its aggregate exports by more than 3 per cent because its domestic demand falls, along with prices, which improves its competitiveness in the world market. The United States is also expected to have higher exports because the rise in its domestic price is less than that in the world price.
Sectoral impacts for Australia Tables 6.4 and 6.5 show the effects on output, consumption and trade. The pattern of impact is similar to that in the case of implementing existing policies, although the magnitude is larger. Despite a fall of 0.5 to 0.7 per cent in total production, Australia’s agricultural and food manufacturing sectors are expected to be positively affected by implementing the Copenhagen targets. While domestic demand
50
for these products is expected to fall, export demand is projected rise together with a fall in imports. The overall impact would be an increase of 0.1 to 0.4 per cent in agricultural production. Table 6.4
Impact on sectoral output and household consumption in Australia
Agriculture sugarcane/sugar beet oil seed rice wheat other crops cattle other livestock forestry and fishery Food processing Meat Other Mining Other manufacturing Electricity Transport and Communications Other services Total
IA
Output A1
All
Consumption IA A1
% 0.39 0.75 0.51 0.76 0.77 0.10 -0.01 1.21 0.20
% 0.11 0.26 0.38 0.27 0.33 0.12 0.02 0.15 0.04
% 0.09 0.41 0.31 0.19 0.26 0.10 0.02 0.10 0.03
% -0.14 0.75 0.48 0.57 0.60 -0.05 0.08 0.25 -0.97
% 0.01 0.67 0.42 0.51 0.51 -0.02 0.30 0.36 -0.59
% 0.00 0.76 0.43 0.58 0.56 -0.03 0.29 0.37 -0.63
0.81 0.98 0.77
0.29 0.40 0.27
0.42 0.37 0.43
-0.26 -0.46 -0.21
-0.21 -0.32 -0.19
-0.23 -0.38 -0.19
-2.77 -0.31 -10.86 -0.80 -0.70
-0.52 -0.71 -4.99 -0.39 -0.30
-0.46 -1.30 -5.15 -0.38 -0.21
-8.98 -0.95 -10.85 -1.06 -0.87
-6.59 0.03 -7.88 -0.76 -0.72
-7.24 -0.31 -8.49 -0.86 -0.78
-0.74
-0.46
-0.55
-1.26
-0.85
-0.99
All
Note: IA – individual action; A1 – Annex 1 trading; All – emission trading among all countries with binding targets. Source: GTAP-E simulations.
The pattern of impact on trade is similar to that in the case of implementing existing policies, although the magnitude is bigger. Most agricultural sectors experience and increase in exports (relative to business as usual) with the exception of other food processing.
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Table 6.5
Impact on exports and imports in Australia IA
Exports A1
All
IA
Imports A1
All
Agriculture sugarcane/sugar beet oil seed rice wheat other crops cattle other livestock forestry and fishery
% 1.30 2.59 0.51 1.10 0.80 0.46 -0.38 2.17 2.25
% 0.89 1.66 0.19 0.84 0.47 0.20 -0.75 1.85 1.48
% 1.00 1.23 0.60 0.80 0.49 0.63 -0.25 1.59 1.54
% -0.28 0.55 -0.17 0.92 0.61 -0.25 -0.72 0.59 -0.48
% -0.09 1.14 -0.03 1.19 1.02 -0.04 -0.44 0.78 -0.41
% -0.15 1.29 0.02 1.30 1.08 -0.06 -0.42 0.73 -0.63
Food processing Meat Other
4.85 4.92 -0.91
4.42 4.78 -0.90
4.95 5.43 -1.08
-3.26 -3.31 -3.25
-2.86 -3.16 -2.82
-2.95 -2.95 -2.95
2.27 4.01 -68.71 5.54 9.40
1.06 5.62 -55.39 5.41 7.83
1.70 5.48 -57.90 5.16 8.30
-8.92 -2.80 57.60 -4.05 -5.03
-4.78 -2.43 36.32 -3.59 -4.17
-6.29 -2.57 39.55 -3.58 -4.31
3.53
3.17
3.44
-3.32
-2.75
-2.93
Mining Other manufacturing Electricity a Transport and Communications Other services Total a
Low base causes big changes. Note: IA – individual action; A1 – Annex 1 trading; All – emission trading among all countries with binding targets. Source: GTAP-E simulations.
52
7. Conclusions Links between climate policy and agricultural trade There are a variety of economic mechanism through which emission mitigation policies may directly and indirectly affect agricultural trade prospects. Relative price changes between different economies are one clear and direct mechanism. Economywide interactions within an economy (that is, resource movements between sectors induced by changes in real wages and the real exchange rate) are another. Figure 7.1 summarises these broad interactions and illustrates the ways in which they are all interrelated.
Resource flows (indirect effects) within Australia Other sectors
Agriculture
Direct impact
Policies in Australia
Net impact on Australian agriculture Trade
Direct impact
Net impact on oveseas agriculture
Agriculture
Other sectors
Resource flows (indirect effects) overseas
International targets and policies
Source: The CIE.
Figure 7.1 The variety of interactions leading to trade implications of climate policies
53
The two broad mechanisms (resource movements within and economy and relative price changes between economies) actually occur together and combine in complex ways to determine the ultimate outcomes of mitigation policies — including carbon pricing or related measures — that induce costs of abatement within economies. The ways in which these core mechanisms combine are likely to vary depending on the specifics of the policies adopted to reduce emissions relative to the levels they would achieve in the absence of the policy interventions. Understanding the implications of particular policy mechanisms requires an analysis which builds up over several steps: 1. understanding what outcome may be in the absence of any policy interaction (the ‘baseline’ or ‘business as usual’ scenario); 2. understanding the implications of particular emission mitigation targets which are often expressed in many different ways for countries around the world; and 3. finding an appropriate means of representing and simulating both the core policy mechanisms and the many interactions that are likely to occur as a result of the implementation of the policy mechanism.
Key findings The lines of research presented in this report illustrate: •
the wide diversity of proposed emission reduction targets across countries;
•
the wide diversity of potential policies to achieve these targets;
•
the broad lack of clarity (except in a few limited cases) surrounding the practical implementation of mitigation policies; and
•
the uncertainties involved in constructing a modelled representation of these targets and policy instruments.
International climate policy formulation is complex, and the details and implications of particular policies are likely to remain uncertain in the near future. This creates a major challenge for analysing the implications — in particular trade implications — of climate policy. The main analytical tool used here — a global economywide model — was used to represent the potential carbon price implications for the various targets proposed within the Copenhagen Accord. While not able to fully represent the full range of policies, this approach indicates a few broad conclusions: •
while carbon policies change relative prices between economies, the magnitude of these changes are composed of many elements and are difficult to predict in advance;
•
initial changes in relative prices between economies are modified by intersectoral or economywide effects within economies. In particular, changes in real wages and the real exchange rate lead to resource movements between sectors within a particular economy, thus modifying some of the initial relative price differences between economies;
•
these economywide effects may offset the initial trade implications of carbon pricing;
54
•
the simulations presented here show that the net effect of international mitigation action is to increase exports of most Australian agricultural products (relative to the baseline or business as usual level of exports).
This last finding, in particular, does not imply that the carbon price is beneficial to the economy as a whole. Restricting emissions is costly. However, the general equilibrium effects on the agriculture sector appear to be broadly positive. These findings are broadly consistent with other recent Australian modelling results. No set of modelling results should be taken as definitive. As noted, a number of steps are required to build up a picture of the potential impacts of mitigation policy. Nevertheless, these findings provide some broad guidance about appropriate sectoral responses to climate policy outcomes. Several possibilities emerge: •
adjustment to a carbon price requires flexibility in domestic and international markets. Factors which inhibit adjustments, such as inflexibilities or constraints in factor or product markets are likely to both increase the cost of mitigation policy and reduce the offsetting benefits for the agricultural sector;
•
responses to mitigation policy could be profitably addressed towards identifying and working to remove such constraints;
•
in particular, the introduction of additional trade barriers along with core mitigation policies around the world could significantly increase the cost of mitigation policies;
•
less transparent mitigation policy mechanisms (those involving constraints that do not emerge as a clear price effect) may also increase the cost of mitigation and make the overall implications for agricultural trade considerably less certain.
Finally, the analysis undertaken in this report has led to the development of a modelling tool that will remain useful for ongoing analysis as the international policy situation continues to evolve.
Issues for the sector to consider These broad conclusions imply three aspects of the evolution of Australian and international greenhouse gas mitigation policy that will remain of interest to the agricultural sector. Each of these will continue to affect the implications of mitigation policy for that sector. These are: •
Transparency. In particular, observing the continued development of climate policies including the nature and relative magnitude of policy responses to climate change. Given a commitment to abatement, transparent price measures are likely to be in the long term interest of the agriculture sector. This is particularly important as an antidote to potentially misleading measures such as food-miles which could end up being to the disadvantage of the Australian industry.
•
Adjustment measures. Carefully examine the development of adjustment packages, especially border price adjustments, that may emerge in the course of the implementation of climate mitigation policies.
•
Barriers to adjustment. Continued examination of whether there are intentional or unintended barriers to adjustment following the introduction of mitigation measures.
55
Each of these is considered in more detail below.
Transparency There is an imperfect but useful analogy with international trade policy; particularly related to the subsidies, border taxes and so on that have long distorted trade in agricultural commodities. The farm sector in Australia has long argued — along with the removal of these subsidies — for improved transparency in policy. Reduced subsidies should not come at the expense of reduced transparency in how the policies are implemented and enforced. The same broad principles apply to climate policy. One of the most challenging aspects of observing international climate policy is the difficulty in getting a fully transparent picture of country policies and their effects. Aside from the uncertainty associated with the quantity pledges of various countries, the implementation of policy — that is, the choice of instruments to achieve the pledges — is likely to have significant implications for trade (because of the different implications for the net balance of cost and demand side effects noted elsewhere in this report). A core economic principle is that the cost of abatement will be minimised where the incentives to abate are equalised across countries (i.e., the marginal costs of abatement are set equal). This point also extends to research effort. The evolution of international climate policy (despite the focus on flexibility mechanisms) makes achieving this objective particularly difficult. This further strengthens the case for transparency in developing international climate policies in order to understand the opportunity cost of particular policy choices. Transparent implementation of climate policies will be essential in order to be able to understand the full implications of policies as they emerge.
Adjustment policies Climate policy, if taken seriously, will require significant industry adjustment in many economies. The process will be more costly if the necessary adjustments are prevented in some way. Adjustment barriers may come in many forms, some of the most important could be factors preventing full transmission of price signals. The same transparency point applies to assistance or adjustment measures given to particular sectors following the introduction of carbon prices or other forms of carbon policy. These measures have implications for both resource flows between sectors within and economy and for trade flows between economies. A particularly important part of this may be the use of border price adjustments.
Barriers to adjustment Effective adjustment to climate policies requires: •
Flexibility in prices in response to the cost and other changes induced by climate mitigation policy measures. This includes flexibility in wages (real wages) and exchange rate settings. Without such flexibility the economic signals from carbon policy cannot be transmitted throughout the economy. Further, the compensating economywide mechanisms (from the perspective of the agricultural sector, for example) will not occur.
•
The ability of consumers and producers to respond to the price signals.
56
•
The absence of technical or technology constraints to adjustment. This is particularly important as without appropriate technical options, it will be impossible for producers or consumers to respond and change behaviour in line with the price incentives.
The extent and importance of these barriers is difficult to predict in advance. Rather, they need to be observed in the course of the implementation of international climate policy.
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Appendix A: Climate change policy details New Zealand The primary climate change policy in New Zealand is an emissions trading scheme which started in 2010. It currently covers electricity generation, industry, liquid fossil fuels, waste, synthetic gases and forestry. The key details of the scheme are: •
The initial scheme target was New Zealand’s Kyoto target (6 per cent below 1990 levels by 200812). Targets after 2012 are to be guided by international post-2012 targets.
•
Permits have a fixed price in the transitional period (which currently does not have an end date) of NZ$25/t CO2-e. Additionally, during the transitional period, polluters are only be required to surrender one permit for every two tonnes of CO2-e emitted (effectively making the price NZ$12.50).
•
Permit prices in the spot market in mid-September 2012 were $NZ4.20 a tonne.
•
International permits (CERs, ERUs and RMUs) created under the Kyoto Protocol are accepted under the scheme. Permits under a future international scheme will also be accepted. Therefore, the long term price will be determined on the international market.
•
Some free allocations are made based on emission intensity of production.
•
In general, no domestic offsets will be allowed but firms in the forestry sector that choose to participate in the scheme can generate credits. These can be traded on the domestic market or converted to Kyoto units for trading overseas.
•
There is currently no legislated date for when biological emissions from agriculture will be included in the NZ ETS. The Government has indicated that agriculture will have surrender obligations in the NZ ETS only if there are economically viable and practical technologies available to reduce emissions and trading partners make more progress on tackling their emissions in general.
In July 2012, a number of revisions were made to the scheme, the additional provisions include: •
introducing 'offsetting' as an option for pre-1990 forests, giving forest landowners the flexibility to convert their land to a better use, but avoid ETS deforestation costs by planting a carbon equivalent area of forest elsewhere
•
introducing a power to allow the Government to increase the supply of New Zealand Units (NZUs, the primary emissions unit used within the ETS) through an auction, within an overall cap on the number of NZUs auctioned and allocated.
•
not introducing a new power that specifically allows for quantitative restrictions on the number of international emissions units that can be surrendered by those with ETS obligations. This will ensure that the carbon prices faced by ETS participants continue to reflect international prices.
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Links to further information: http://www.mfe.govt.nz/publications/climate/emissions-trading-bulletin-11/index.html#summary http://www.climatechange.govt.nz/reducing-our-emissions/government-policies.html http://www.climatechange.govt.nz/emissions-trading-scheme/ets-review-2011/review-report.pdf http://climatechange.govt.nz/emissions-trading-scheme/ets-amendments/index.html https://www.climatechange.govt.nz/emissions-trading-scheme/participating/agriculture/ http://www.odt.co.nz/news/business/226151/fears-emissions-trading-scheme
United States Federal policies The US submitted a target to the Copenhagen Accord of 17 per cent below 2005 levels by 2020, but meeting the target would be dependent on domestic climate change legislation being passed. Emissions trading legislation was introduced into both houses of Congress but never passed through the Senate. The proposed legislation that passed the House of Representatives (the American Clean Energy and Security Act or the Waxman-Markey Bill) had the following elements: •
Scheme cap of: o
3 per cent below 2005 levels by 2012;
o
17 per cent by 2020;
o
42 per cent by 2030;
o
83 per cent by 2050.
•
Covers seven gases (six Kyoto gases plus nitrogen trifluoride (NF3)).
•
Covered sectors would be stationary sources, petroleum producers and importers, natural gas distributors and producers of ‘F-gases’.
•
Permit allocation would be free for electricity and gas distributors, trade exposed merchant coal generators and oil refineries; other permits will be auctioned.
•
Agriculture and forestry offsets would be eligible as well as other project based offsets (eligible activities are yet to be decided).
The rejection of this legislation in the Senate caused a shift to actions by the EPA to regulate GHGs under the existing Clean Air Act. In future, stationary sources of industrial and power facilities (heavy emitters) may be regulated by the EPA under its general New Source Performance Standards. 13
13
http://www.rff.org/rff/Documents/RFF-DP-10-23.pdf
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The Federal government offers a range of financial support and incentives for clean and efficient energy but there are no federal regulations to mitigate climate change. Two key federal programs are the Renewable Production Tax Credits and the Renewable Energy Grants. An annual tax credit is provided for the first ten years of operation at rate of US$0.022 per kWh for wind, geothermal and closed-loop biomass and half this for other sources. Grants are provided for up to 30 per cent of costs for fuel cells, solar, small wind, biomass, landfill and geothermal waste. There is also a federal Renewable Fuel Standard which has a target of 36 billion gallons of biofuels by 2022 (of which 21 billion gallons must be from advanced biofuels). Mandates have been set for cellulosic ethanol and other advanced biofuels from maize starch. To support the standard, there is an Alcohol Fuel Credit, Biodiesel Fuel Credit, Bioenergy Program for Advanced Biofuels, Excise Concessions for Ethanol and government purchasing agreements.
State and regional policies There have been numerous state based and regional programs. The major ones are the Western Climate Initiative (WCI), Midwestern Greenhouse Gas Accord (MGGA) and the Regional Greenhouse Gas Initiative (RGGI). RGGI is a cap and trade scheme that covered the power generation sector of 10 US states, although New Jersey withdrew. The overall cap is to reduce CO2 emissions from the power sector by 10 per cent by 2018, compared to 2009. Permits under the scheme are auctioned and the price of a permit at auction in March 2011 was $1.89, down from $3.51 in March 2009. The cap is not binding at this stage. WCI is a proposed emissions trading scheme for seven US states and four Canadian provinces. However, all US states except for California have withdrawn from the WCI14 and California and Quebec are the only jurisdictions so far to have implemented schemes. The first compliance period of the California scheme started in 2013, after 2015 the scheme is expected to cover about 85 per cent of the state emissions. •
The scheme covers electric utilities, cement, lime, nitric acid, refineries and electricity generation that has annual emissions exceeding 25,000 tCO2-e. From 2015 it will also include transport fuel distributors and upstream natural gas suppliers.
•
Permit allocations were initially made using a benchmarking approach similar to the EU ETS as well as through auctions.
•
Limited offsets use (8 per cent of obligations) is allowed from Air Resources Board offsets credits and sector based offsets credits (all generated in the US) which include forestry and agriculture credits.
Another proposed regional cap and trade scheme is the Midwestern Greenhouse Gas Accord (MGGA) which covers five states and one Canadian province. While not officially suspended, states have not pursuing the development of the trading scheme. A diverse array of US states and Canadian provinces have formed the North America 2050 Initiative. North America 2050 is a forum for states, provinces and stakeholders to identify leadership opportunities in climate and clean energy policy.
14
http://lawprofessors.typepad.com/environmental_law/2011/12/six-us-states-withdraw-from-the-westernclimate-initiative.html
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As well as participating in these regional initiatives, many US states have adopted emission targets, renewable portfolio standards, net metering, biofuel mandates and incentives, and building energy codes. Around 36 states have mandated renewable energy targets and five states have aspirational targets. Financial incentives (tax credits, tax exemptions, reduced tax rates, grants, loans and funding) for biofuel use are available in 37 states. In 24 states there are vehicle acquisition and fuel use requirements for states, schools and public fleets to run on biofuels or use a certain percentage of biofuels. And in 11 states there are fuel standards or mandates requiring low carbon fuels or fuel blends. A voluntary scheme, the Chicago Climate Exchange (CCX), was open to businesses from around the world but most of the participants were from the US. The scheme aimed to reduce emissions of participants to 6 per cent below 2000 emission levels by 2010. Free permit allocations were made based on historical emissions and the required reductions and a project based offsets program is used. Offsets included agricultural methane reduction through digesters, organic waste disposal (composting), conservation tillage and grassland conversion, and managed rangelands. Links to further information http://www.westernclimateinitiative.org/ http://www.pewclimate.org/what_s_being_done/in_the_states/mggra http://www.pewclimate.org/what_s_being_done/in_the_states/map_ethanol.cfm http://www.chicagoclimatex.com/content.jsf?id=1021 http://www.rff.org/rff/Documents/RFF-DP-10-23.pdf http://www.c2es.org/us-states-regions/regional-climate-initiatives
Canada Canada’s emission reduction target is the same as the US, 17 per cent below 2005 levels by 2020. Canada is looking to align its major climate change policies (including a cap and trade scheme) with the US. Policies that have been established are: •
a renewable fuels standard which requires renewable fuel content of five per cent in gasoline;
•
stringent standards for coal powered electricity generation based on the performance of highefficiency natural gas generation;
•
vehicle emission standards including an emissions credit system; and
•
financial support for CCS development and other clean energy projects.
A number of provinces participate in the MGGA and WCI as described under the US section. The provinces also have an array of other climate change policies including financial incentives for clean energy and energy efficiency and standards for buildings and vehicles.
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British Columbia has a tax of $10/t CO2-e on fossil fuel combustion that covers 76 per cent of emissions. The province will also require all new electricity generation projects to have zero net emissions. The province as a zero net deforestation target and is exploring options for reducing emissions in agriculture. British Columbia enacted legislation to establish a cap and trade scheme but failed to implement the policy by the planned date in 2012 and has not made any further progress. Alberta has an emission intensity reduction target for all large industrial facilities, offsets under the program include agriculture and forestry offsets. Any required emission reductions that are not met are paid for through a fee of $15/t CO2-e to a technology fund. In Ontario all coal fired power generation will be phased out by 2014. Ontario is also developing offset protocols for the agriculture and forestry sectors. Quebec has a modest carbon tax with the primary aim of raising funds for the implementation of other measures. It also was the first state to implement cap-and-trade regulations, commencing with a transition year in 2012. From 2013 around 80 sites in the industrial and electricity sectors with annual emissions greater than 25,000 t CO2-e were covered by the scheme. Fuel distributors and major fuel users will also be covered from 2015. The scheme is likely to be linked with the California scheme from 2014. Links to further information http://pubs.pembina.org/reports/highlights-of-provincial-greenhouse-gas-reduction-plans.pdf http://www.mddefp.gouv.qc.ca/changements/carbone/Systeme-plafonnement-droits-GES-en.htm
European Union The main climate change policy in the EU is the ETS which has been operating since 2005. Emissions are expected to be 21 per cent lower than 2005 by 2020 based on the planned allocation of permits. The scheme applies to EU27 countries plus Norway, Iceland and Liechtenstein. The scheme covers CO2 emissions but the Netherlands has also included N2O emissions, in phase 3 of the scheme from 2013 the coverage was extended to N2O emissions from production of nitric, adipic and glyocalic acid production and perfluorocarbons from the aluminium sector. The covered firms are power stations and other combustion plants, oil refineries, coke ovens, iron and steel plants and factories making cement, glass, lime, bricks, ceramics, pulp, paper and board, and aviation from 2012. From 2013, CO2 emissions from petrochemicals, ammonia and aluminium were also covered. Agriculture is not included and offsets from land use activities are not eligible. Allocation of permits is gradually shifting toward full actioning by 2020. For sectors not covered by the ETS, including farming, an emission reduction target of 10 per cent below 2005 levels applies. The EU Commission has proposed draft legislation for carbon stored in forests and farm land to be incorporated in to greenhouse gas reduction targets. However, accounting methods are required to be robust before their incorporation in to the target. EU biofuel policies require 10 per cent of transport fuels to be provided from biofuels by 2020. The European Union has a mandated renewable energy target of 20 per cent by 2020. It has applied this through tradable certificate scheme, with different technologies receiving different levels of support depending on cost. There are no other climate change policies that apply to agriculture across the EU. Some elements of the CAP were revised to ensure it didn’t encourage activities that contributed to emissions and rural development programs in some countries address climate change — but mostly through discussion
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rather than implementing specific measures. Measures include support for improving energy efficiency of buildings, use of organic by-products for bio-energy (some include support for energy crops). Overall, the measures seek to provide subsidies or efficiencies to help agriculture and at the same time encourage a shift to lower carbon production. Links to further information http://europa.eu/rapid/pressReleasesAction.do?reference=IP/07/1614&format=HTML&aged=0&lang uage=EN&guiLanguage=en http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/08/796 http://www.euractiv.com/en/climate-change/eu-emissions-trading-scheme/article-133629 http://ec.europa.eu/agriculture/climate_change/sec2009_1093_en.pdf http://www.euractiv.com/en/transport/biofuels-transport-linksdossier-188374 http://ec.europa.eu/clima/summary/docs/climate_package_en.pdf
Japan A proposed emissions trading scheme for Japan has been put on hold until at least 2014 due to business concerns. Japan has implemented a voluntary scheme, the Japan Voluntary Emissions Trading Scheme (JVETS), which ended in 2011, and a trial ETS which ended in 2012. Additionally, the country is operating the J-Credit Scheme, a merger of two domestic voluntary crediting schemes. Several sub-national schemes are also in operation. The Tokyo Metropolitan Government established an emissions trading scheme covering energy related emissions for buildings and factories in Tokyo. Participants are allocated free allowances and are able to use domestic offset credits. From 2011 the Saitama ETS started and was linked with the Tokyo scheme. A scheme is also operating in Kyoto. Japan also has a Renewable Portfolio Standard for electricity retailers. This includes mandatory purchase requirements for excess electricity produced from solar PV systems. Japan has a tax on petroleum and coal which is planned to increase between 2013 and 2015, with the rate based on the CO2 content. Ethanol blended petrol is exempt. No climate change policies applying to the agriculture sector were found in the policy review. Links to further information http://www.climatespectator.com.au/news/japan-shelves-carbon-emissions-trading-scheme-1 http://www.env.go.jp/en/earth/ets/idmets081021.pdf http://www.apec-vc.or.jp/e/modules/tinyd00/index.php?id=130&kh_open_cid_00=34 http://enviroscope.iges.or.jp/modules/envirolib/upload/1861/attach/kobashi_cebu200809.pdf http://www.japantoday.com/category/business/view/tokyo-govt-launches-asias-1st-emissions-tradingscheme
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http://www2.kankyo.metro.tokyo.jp/sgw/e/data/Tokyo-cap_and_trade_programmarch_2010_TMG.pdf
China In 2011 seven Chinese provinces and cities were designated as pilots to test emissions trading. The pilots start at different times in 2013, the Shenzhen scheme started in June 2013. Other pilots are at various stages of planning and development. None of the schemes include the agriculture sector, but all are mandatory for the covered sectors (which vary between the schemes). In parallel with these regional pilot schemes, a national emissions trading scheme is being considered. A date for the start of a national scheme as not been officially set, but an aspirational timeframe has the scheme starting in 2015. As part of China’s Nationally Appropriate Mitigation Action Plan submitted to the UNFCCC Secretariat, China pledged to reduce emission intensity by 40–45 per cent compared with 2005, and also undertook to increase forest cover by 40 per cent (forest cover to increase by 40 million hectares and forest stock volume by 1.3 billion cubic metres). The mitigation plan focuses on energy conservation and efficiency in the industrial sector including through low cost Large Substitute for Small Program. The National Climate Change Program notes plans for action in the agriculture sector such as: •
establishing and strengthening laws pertaining to land management and agriculture to allow for land to be used for carbon storage. Restrictions will be placed on redevelopment of land used for carbon storage;
•
improving agricultural practices such as extending technologies to aid in reasonable use of chemicals, better fertiliser management programs and encouraging the use of organic fertiliser; and
•
supporting research into agricultural technologies, such as low emission rice varieties and irrigation methods.
China has a number of policies to support renewable energy production such as national feed-in tariffs for wind and biomass, and subsidies for solar PV in buildings. China also has fuel excise exemptions for biodiesel and ethanol and subsidies for losses by manufacturers of biodiesel and ethanol fuel. Links to further information http://www.agritrade.org/events/documents/ClimateChangeChina_final_web.pdf
South Korea South Korea passed its ETS law in 2012 for a mandatory cap and trade program. The first commitment period will start in 2015, it is expected around 60 per cent of national emissions will be covered and will aim to help meet the national emissions reduction target of 30 per cent below business-as-usual by 2020. It is expected that permits will be allocated freely using a benchmarking system. Until 2021 only domestic offsets will be allowed, and after 2021 international offsets will be permitted. Other climate change policies in Korea are focused on the energy sector. Measures taken by the government include:
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•
switching central heating systems from petroleum to gas fuelled
•
maintaining the share of nuclear energy in the power sector
•
improve energy efficiency through price adjustments, technology development, energy performance standards and labelling schemes
•
preferential purchase of electricity from renewable sources
•
introduced Compressed Natural Gas buses to replace older diesel buses
•
energy auditing and financial/technical support program for industrial energy users
•
expansion of the urban subway system
•
Green building certificate program
Links to further information http://pub.iges.or.jp/modules/envirolib/view.php?docid=156 http://eng.me.go.kr/content.do?method=moveContent&menuCode=pol_gre
India In 2008 India released its National Action Plan on Climate Change which identified eight core ‘missions’ for climate action. Under these missions by 2017 India aims to increase renewable energy generation to around 10 per cent, retire inefficient coal power plants, make residential energy efficiency improvements, implement vehicle fuel efficiency standards, require 5 per cent ethanol content in gasoline and reforest 6 million hectares of degraded land. Renewable energy targets can be identified in at least 21 states, ranging from less than 1 per cent to 14 per cent uptake by 2015-16. Separate targets are set for solar and non-solar generation. A range of mechanisms supported these targets: national and sub-national feed-in tariffs, certification schemes, capital subsidies at the national and state levels, preferential loans and fossil fuel taxes including for electricity generation. The Indian Perform, Achieve and Trade Scheme commencing in April 2011 will require around 700 of the most energy intensive industrial units and power stations (which contribute to around half of emissions) to reduce their energy intensity to a specified percentage. Links to further information http://www.pewclimate.org/docUploads/India-FactSheet-09-08.pdf
Argentina In Argentina, as well as supporting CDM projects, the government introduced a number of energy related initiatives that reduce emissions as well as achieving other objectives, such as energy efficiency, controlled landfills and supporting wind farms.
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Argentina passed a law in December 2006 for 8 per cent of electricity demand to be generated by renewable energy sources by 2016 and the introduction of feed-in tariffs. Tariffs are applicable for 15 years. To overcome project financing hurdles and low electricity prices, certain provinces have introduced tax incentives to encourage uptake. Energy efficiency and uptake of renewable energy has been held back by large government subsidies for energy inputs. They also have biofuels policy that requires biofuels to be blended with all transport fuels. There are also tax and subsidy benefits for forestry activities. It is hoped that increasing fossil fuel consumption from growing energy demand can be offset through more restrictive forest legislation introduced in 2009 (Forest Law, Law No. 26.331). In agriculture, the government provides support to help improve productivity of pastureland, implement animal sanitation procedures and improve animal diets all with the aim of reducing methane emissions from raising livestock. Links to further information http://unfccc.int/resource/docs/natc/argnc2s.pdf http://siteresources.worldbank.org/INTLAC/Resources/Climate_ArgentinaWeb. pdf
Brazil The National Action Plan on Climate Change for Brazil outlines a number of strategies to improve energy efficiency, replace fuels in steel plants, replace refrigerant gases and increase renewable electricity generation — including from sugarcane bagasse. In agriculture, measures include requiring mechanised harvesting of sugarcane rather than use of fire for clearing, providing incentives for sustainable agriculture such as recovering degrading pasture, integrating crop and livestock systems, encouraging agro-forestry, shifting to zero-tillage systems and switching from nitrogenous to organic fertilisers. Brazil also has a significant biofuels industry and is aiming to increase biofuel production and consumption, targeting an annual average increase in ethanol consumption of 11 per cent. Brazil also intends to provide technical assistance to other countries to expand the production of ethanol from sugarcane. Finally, Brazil has a number of initiatives to slow deforestation and increase reforestation. Links to further information http://www.mma.gov.br/estruturas/208/_arquivos/national_plan_208.pdf http://ec.europa.eu/europeaid/where/latin-america/regionalcooperation/documents/climate_change_in_latin_america_en.pdf
Indonesia Indonesia aims to voluntarily reduce GHG emissions by up to 26 per cent from BAU levels by 2020. Indonesian climate change mitigation ambitions, as outlined in the National Climate Change Action Plan, include energy diversification and conservation efforts and forestry related activities such as preventing illegal logging, land rehabilitation and increasing plantation forestry. Other potential activities highlighted include encouraging the use of organic fertiliser and pesticides, low-emission
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rice practices and utilisation of efficiency machinery. Toward Green Indonesia is an incentive program that rewards districts for protecting forests and increasing forest coverage in the area. Indonesia has attracted a large number of CDM projects. It is also establishing a voluntary carbon market and undertaking feasibility studies for bilateral offset credit mechanisms with more than 30 countries. Most reduction are expected to come from land use change and forestry, peat and the power sector. Links to further information http://www.uncsd2012.org/rio20/content/documents/Indonesia%20National%20Action%20Plan%20 Addressing%20Climate%20Change.pdf
Thailand Thailand has a number of policies to encourage energy efficiency and renewable energy sources. They are also aiming to reach an ethanol consumption target of 9 million litres per day by 2021 and have implemented a 5 per cent biodiesel mandate. Favourable tax treatment is provided on blended fuels. Links to further information http://www.adb.org/documents/books/economics-climate-change-sea/Economics-Climate-Change.pdf
Malaysia In Malaysia incentives are provided for renewable energy investments, energy efficiency standards are being introduced and the government is looking to improvement management of solid wastes. The government will seek to plant trees and provide incentives to states for protecting forests. A 5 per cent biodiesel mandate was introduced in some areas but has so far not been met. Despite this, there are discussions of an increase of the mandate to 10 per cent. Links to further information http://www.epu.gov.my/html/themes/epu/html/RMKE10/img/pdf/en/chapt6.pdf http://biz.thestar.com.my/news/story.asp?file=/2013/2/23/business/12742691&sec=business
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Tourney, D. and Kamal Gueye, M. 2009, Climate change mitigation policies in selected OECD countries: Trade and development implications for developing countries, ICTSD Programme on Competitiveness and Sustainable Development, ICTSD Series on Climate Change and Competitiveness, Issue Paper No.8, International Centre for Trade and Sustainable Development, Geneva. Tulloh, C., Ahammad, H., Mi, R. and Ford, M. 2009, ‘Effects of the Carbon Pollution Reduction Scheme on the economic value of farm production’, Issues, insights 09.6, ABARE, Canberra. Tulloh, C. and Pearce, D Transport Infrastructure for Australia’s Agricultural Needs RIRDC Publication No. 11/096, Rural Industries Research and Development Corporation, Canberra. UNFCCC 2010, National greenhouse gas inventory data for the period 1990-2008, United Nations Framework Convention on Climate Change, available at http://unfccc.int/resource/docs/2010/sbi/eng/18.pdf ― 2011a, Compilation of economy-wide emission reduction targets to be implemented by Parties included in Annex I to the Convention, United Nations Framework Convention on Climate Change, available at http://unfccc.int/resource/docs/2011/sb/eng/inf01r01.pdf ― 2011b, Compilation of information on nationally appropriate mitigation actions to be implemented by Parties not included in Annex I to the Convention, United Nations Framework Convention on Climate Change, available at http://unfccc.int/resource/docs/2011/awglca14/eng/inf01.pdf ― 2011c, National greenhouse gas inventory data for the period 1999-2009, United Nations Framework Convention on Climate Change, available at US Department of State 2010, U.S. Climate Action Report 2010: Fifth National Communication of the United States of America Under the United Nations Framework of Convention on Climate Change, Department of State, Washington D.C., available at http://unfccc.int/resource/docs/natc/usa_nc5.pdf
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Modelling the Trade Implications of Climate Mitigation Policy By Tingsong Jiang, David Pearce, Catherine Tulloh and Lauren Retief Pub. No. 12/104 This report considers the potential agricultural trade implications of global policies introduced to reduce greenhouse gas emissions. The global policy landscape is complex, and it is important to be able to analyse potential implications for Australian agricultural industries to allow decision makers to respond appropriately to emerging outcomes. This report is targeted at individuals and organisations dealing with the design of climate policy from the agricultural perspective as well as those charged with managing strategic responses to policy developments, both nationally and internationally. RIRDC is a partnership between government and industry to invest in R&D for more productive and sustainable rural industries. We invest in new and emerging rural industries, a suite of established rural industries and national rural issues. Most of the information we produce can be downloaded for free or purchased from our website . RIRDC books can also be purchased by phoning 1300 634 313 for a local call fee.
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