Analysis of the economic impact of different Chinese climate policy options based on a CGE model incorporating endogenous technological change
Introduction
There is growing awareness that climate change is one of the main global challenges of the 21st century. In recent years the evidence has strengthened that climate change, brought on by humans, is already underway and has been coupled with indications that the impact will be more serious and far-reaching than previously thought. In order to meet the challenge of climate change and to control man-made greenhouse gas emissions (GHGs), the international climate community is currently negotiating a new global climate change regime to strengthen the international efforts beyond 2012, continuing on from the first commitment period of the Kyoto Protocol (2008–2012).
The setting of emission control targets for the global community is one of the most important issues of the negotiations. As a developing country, according to the principle of common but differentiated responsibility, China currently does not need to make commitments on emission reduction. However, as one of the largest emitters of GHGs and one of the fastest growing countries in the world, China is facing tremendous pressure on emission reduction commitments. At the 13th meeting of the UNFCCC Conference of the Parties, China and other developing countries agreed to take appropriate mitigation actions in a measurable, reportable and verifiable manner. This shows that no matter what climate regime the international community achieves, China's domestic mitigation actions within the country will be put on the agenda.
Abatement cost and economic impact are the main concerns for climate change mitigation strategy as well as an important basis for the setting of emission control targets. Economic modeling can support the understanding of cost and economic impact of different strategies for GHGs emissions and it plays a prominent role in this kind of climate policy debate (Peace and Weyant, 2008).
Technological change is particularly important during these climate policy debates. They are based on economic models that are affected by the long-term scales that are characteristic of climate change (IPCC, 2007).
Technological change can be understood as the increase in outputs (including abatement) possible with a given level of inputs (including emissions) through the processes of invention, innovation, and diffusion (Gillingham et al., 2008). Technological change can help combat climate change by improving energy efficiency through product and manufacturing innovation whilst reducing the economy's reliance on fossil fuels and cutting GHGs emission intensity. Consequently, the cost of mitigation measures and any adverse effects on the economy will fall.
The management of technological change in an emissions and climate policy modeling framework can have a huge effect on cost estimates for any environmental target (IPCC, 2007). In traditional climate policy models, technological change has been regarded as an exogenous factor which gradually changes with time. In contrast to exogenous technological change which is unresponsive to policy, endogenous technological change implies incorporating a feedback mechanism by which policy changes the direction of technological change toward carbon-saving technology change (Gillingham et al., 2008).
Since the release of the IPCC Third Assessment Report in 2001, climate policy models have made great progress in endogenizing technological change. The assumption of endogenous technological change and corresponding modeling methods have come to affect these models’ simulation results regarding carbon emission permit prices, carbon tax rates, and macroeconomic indicators such as GDP and welfare level. The application of climate policy models incorporating endogenous technological change has deepened the discussion of some hot issues such as cost of emission reduction measures as well as the optimized mitigation path. Nowadays, there is an extensive literature discussing endogenous technological change and its important role on possible climate change policy whilst comparing the simulation results of different modeling methods for technological change (Grübler, 1998; Löschel, 2002; Weyant, 2004; Barker et al., 2006; Edenhofer et al., 2006; etc.).
There are two main approaches of modeling endogenous technological change: investment in research and development (R&D) and technology learning. The technology learning method is usually used in bottom-up models such as energy system optimization models which capture the cost of specific energy technology through a technology learning curve. Whereas the R&D method is usually used in top-down models which incorporate knowledge capital into integrated or sectoral production functions and analyze the effect of the accumulation of knowledge capital induced by R&D activities on emission reduction costs.
The Computable General Equilibrium (CGE) models are one of the most common tools based on a top-down modeling framework used to analyze the long-term economic implications of climate change policy (Wang and Chen, 2006; Peace and Weyant, 2008). CGE models are simulations that combine the abstract general equilibrium structure formalized by Arrow and Debreu with realistic economic data to solve numerically for the levels of supply, demand, and price that support equilibrium across a specified set of markets (Sue Wing, 2004). When considering endogenous technological change in the CGE model, the R&D method is more appropriate because it is convenient to build a knowledge capital market in the CGE model framework and it can simulate R&D's effect on the accumulation of knowledge capital on the production cost. Many early CGE models have used the AEEI method to simulate exogenous technological change such as Green (Burniaux et al., 1992), GEM-E3 (Capros et al., 1997), and PACE (Böhringer, 1998). Recently, most popular CGE models used for climate policy analysis have used the R&D methods to simulate endogenous technological change such as the model built by Goulder and Schneider (1999), the model built by Sue Wing (2001) based on EPPA model, IMACLIM-R (Crassous et al., 2006) and NEWAGE-W model (Zuern et al., 2007), etc. In China, CGE is also a kind of popular method used for climate policy analysis and argument. For instance, Wang Can has build a 10 sectors CGE model (named as TEDCGE) to analyze the economic impact of potential carbon tax (Wang, 2003). But so far the number of CGE models built for China is still relatively small and few models has considered endogenous technological change.
Due to the current situation facing China, the aim of this article is to carry out abatement cost analysis based on the link between technological change and abatement cost, to assess the economic impact of China's CO2 emission control scenarios and finally to support the discussion of China's mitigation strategy. The methodology used in this article is based on a CGE model incorporating an R&D approach of endogenous technological change. This study has analyzed and compared the economic impact of different approaches to mitigation commitment as well as the potential role of technological change in the formulation of mitigation targets and commitments, taking into account China's climate policy-making needs based on the current international climate negotiation process.
In the remaining part of this article, Section 2 briefly described the CGE model used in this article; Section 3 introduced the baseline scenario of China's economic growth and CO2 emission and provide a reference for the following analysis; Section 4 carried out CO2 abatement cost analysis of China and discussed the effect of technological change on marginal abatement cost; Section 5 separated the emission reduction target into effect of output, energy intensity and emission factor per unit of energy and explored the important role of energy intensity decline in China's emission reduction; Section 6 designed different emission reduction scenarios in China and analyzed the economic impact of these scenarios. Section 7 concluded the main results of this article and pointed out some suggestions for further study.
Section snippets
Description of TDGE_CHN model
In order to assess the economic impact of China's different emission control targets, this study has established a new and dynamic CGE model incorporating endogenous technological change and consisting of 41 sectors describing China's integrated economic energy and environmental system (Technology-oriented Dynamic computable General Equilibrium model for China, hereinafter referred to as TDGE_CHN).
Baseline scenario of China's economic growth and CO2 emission
The projection of costs associated with reducing GHG emissions starts with a projection of GHG emissions over time, assuming no new climate policies (Weyant, 2004). This is called the baseline scenario and is one of the most important elements in determining the simulation results. CGE models are used to assess the economic impact of a specific policy or measure through the comparison between the baseline scenario and policy scenario. In other words, the definition of the baseline scenario is
Marginal abatement cost of China
Abatement cost is considered to change in line with the increase of emission reductions. In the discussion of abatement cost, the concept of marginal abatement cost (MAC) is usually used, meaning incremental cost for every extra unit reduction of CO2 emission. Marginal abatement cost in the TDGE_CHN model is the equilibrium price of carbon when imposing carbon emission constraints.
In this study, the emission reduction rate of each target year, compared to the baseline scenario, has been set as
Breakdown of the emission reduction target
The emission reduction target has been separated into effect of output, effect of energy intensity, and effect of emission factor per unit of energy. As shown in Table 9, China's emission reduction mainly depends on the decline of energy intensity and R&D can strengthen the effect of energy intensity for emission reduction. This is because R&D can change the relative price of production factors and stimulate the substitution among factors during the production process.
However, when there is a
Economic impact analysis of possible commitment
China has been facing tremendous pressure on emission reduction commitments during the current international climate change negotiations.
This study has designed three possible emission reduction commitments and used the TDGE_CHN model to analyze the economic impact of these commitments whilst supporting the discussion of China's future mitigation strategy.
Table 10 shows the definition and description of mitigation scenarios in this study.
Different mitigation scenarios mean different emissions
Conclusion
This study established a new integrated economic, energy, and environmental dynamic computable general equilibrium (CGE) model (TDGE_CHN) representing endogenous technological change for China's climate change policy analysis.
Using the TDGE_CHN model, this study simulated and analyzed the characteristics of technological change induced by R&D and its impact on the economic system, as well as the degree of impact and mechanism on mitigation cost as a result of technological change. In addition
Acknowledgement
This paper is financially supported by the Ministry of Science and Technology (MOST) of China (No. 2007BAC03A07-08).
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