Climate Change 2001: Mitigation

9.2 Economic, Social, and Environmental Impacts of Policies and Measures on Prices, Economic Output, Employment, Competitiveness, and Trade Relations at the Sector and Sub-sector Levels

Studies of the impact of mitigation policies on sectors can be divided into those which adopt a general approach and cover all the sectors of the economy in question, and those which concentrate on one sector or group of sectors, leaving aside indirect effects on the rest of the economy. The general studies are discussed in 9.2.1, and the sector studies are considered in the sections that follow.

The studies can also be arranged according to the methodology of the analysis:

top-down studies, that capture general effects on the economy and tend to consider price-driven policies such as carbon taxes rather than technology policies;
bottom-up studies that do not consider general effects but examine technology-driven options¹ ; and
financial cost-benefit analyses of individual mitigation measures, which do not include impacts on social factors, but sometimes do include the ancillary benefits (e.g., ADB-GEF-UNDP, 1998a).

The general studies tend to be top-down, although there have been major comprehensive bottom-up studies (e.g., Krause et al., 1992). Many of the individual sector studies are bottom-up or cost-benefit. The top-down and bottom-up methodologies are compared in Section 9.4.1.1.

9.2.1 Impacts from Multisectoral Studies

These studies tend to use large-scale models as a framework for the analysis. Important differences between the studies arise from the type of model being used (computable general equilibrium (CGE) or econometric), the method chosen for the recycling of any tax revenues, and the treatment of the world oil market. Two topics, the effects of carbon taxes (and more recently traded emission permits) and the removal of energy subsidies, have been assessed in some detail.

9.2.1.1 Effects of Carbon Taxes and Auctioned Emission Permits

Table 9.1 gives some details of studies of mitigation policies for which sectoral effects are available. These are all at a country or world-region level (e.g., the European Union). The table also shows the outcomes of different policies on carbon dioxide (CO₂) emissions, GDP and sectoral outputs. For some studies a range of outcomes is shown, corresponding to the range published for GDP depending on some critical assumption, such as the method chosen to recycle government revenues. The effects are shown as differences from the reference scenario or the base in the final year of the projection. Note that the macroeconomic results of these studies are covered in Chapter 8.

Table 9.1: Some multisectoral studies of carbon dioxide mitigation

Region or reference country	China Garbaccio et al. (1999)	EU-6 DRI (1994)	EU-11 Barker (1999)	New Zealand Bertram et al. (1993)	UK Cambridge Econo- metrics (1998)	USA CRA and DRI (1994)	USA Jorgenson et al. (1999)	USA McKibbin et al. (1999)

Funding body	US Dept of Energy	EC	EC	NZ Min of Environ- ment	FFF-FOE	Electric Power Research Institute		US EPA
Model		DRI-models	E3ME	ESSAM	MDM-E3	DRI	JWS	G-cubed
Model type	Static CGE	Macro	Macro	CGE	Macro	Macro	Dynamic CGE	Dynamic CGE
Policy	Carbon tax	Carbon tax	Carbon tax	Carbon & energy taxes	Carbon tax	Carbon tax	Emission permits	Emission permits
Recycling mode	All other taxes	Employer taxes	Employer taxes	Corporate tax	Employer taxes	Lump- sum	Personal income	Lump- sum
Industries	29	20-30	30	28	49	About 100	35	12
Fuel types	4	17	11	4	10	4	4	5
Period	1992 to 2032	1992 to 2010	1970 to 2010	1987 to 1997	1960 to 2010	1990 to 2010	1996 to 2020	1996 to 2020
Effect year	2032	2010	2010	1996/97	2010	2010	2020	2010
Model run	15%	INT	Mult-coord.	324	C72F11	$100/tC	Personal	Unilateral US
CO₂ GDP	-15% +1%	-15% +0.9%	-10% +1.4%	-46% +4.6%	-4.4% +0.1%	-15.3% -2.3%	-31% +0.6%	-29.6% -0.7%
Output: coal	-19%	Energy -7%	-8%	-24%	0%	-25%	-52%	-40%
: refined oil	-2		-17	-22	-0	-6	-4	-16
: gas			-4	-41	-4	-18	-25	-14
: electricity	+3 (year 1)		-3	-17	-1	-17	-12	-6
: agriculture	+0 (year 1)	-7	+3	+4	+0		+4	-1
: forestry	..	..	..	+5	..	..	..	-1
: food, etc.	+0 (year 1)	Manufac- turing +1	+2	+3	+0		+5	Nondur- ables -1
: chemicals	+1 (year 1)		+2	+6	-0		-0	..
steel	+1 (year 1)		+1	-26	-1	-5	-3	Durables 1
: construction	+1 (year 1)	..	+1	+0	+0		+1	..
: transport	+1 (year 1)	-2	+0	+5	+0	-4	+1	-2
: services	+0 (year 1)	+1	+1	+6	+0	-2	+3	-0
: consumer’s expenditure	+0.8%			+6.7%	+0.1%	-1.9%	+0.7%	-0.4%

Notes: (1) “Multisectoral models” are defined as those in which GDP is divided into production sectors. Definitions of sectors differ between studies. (2) .. denotes not available or not reported.

Several conclusions are well established in this literature.

The nature of the recycling of revenues from new taxes or permit schemes is critical to the sectoral effects (and the overall GDP effects - see Chapters 7 and 8 for a detailed discussion of the recycling literature). In some of the studies (e.g. Garbaccio et al., 1999, 2000), GDP is increased above the reference scenario when rates for some burdensome tax are reduced. Those studies that report reductions in GDP do not always provide a range of recycling options, suggesting that policy packages that increase GDP have not been explored.
Reductions in fossil fuel output below the reference case will not impact all fossil fuels equally. Fuels have different costs and price sensitivities, they respond differently to mitigation policies, energy-efficiency technology is fuel and combustion device specific, and reductions in demand can affect imports differently from output. Large effects on gas output are discussed below in Section 9.2.3.2.
In most instances the relative decline in output does not imply an absolute decline of the sector; rather it implies a decline in its rate of growth. This is particularly true for the oil sector, where under present technology there is a captive market in the use of oil for personal transportation, which is expected to increase substantially over the foreseeable future (this is not shown in Table 9.1, but reflected in the literature).
The sectoral results suggest that agriculture usually benefits². The effects on manufacturing are mixed and the reasons for these results are explored below. Finally, the service sectors generally increase their output as a result of the policy shifts; since services are such a large proportion of GDP, if the overall economy has higher output this usually implies that services have higher output.

It is worth placing these results and the tasks faced by mitigation policy in an historical perspective. CO₂ emissions have tended to grow more slowly than GDP in a number of countries over the last 40 years (Proops et al., 1993; Price et al., 1998; Baumert et al., 1999). The reasons for such trends vary but include:

a shift away from coal and oil, and towards nuclear and gas as the sources of energy;
improvements in energy efficiency by industry and households; and
a shift from heavy manufacturing towards more service and information-based economic activity.

These trends will be encouraged and strengthened by mitigation policies.

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