Market Power Rents and Climate Change Mitigation A Rationale for Export Taxes on Coal? Philipp M. Rihter, Roman Mendelevith, Frank Jotzo Roman Mendelevith 9 th Trans-Atlanti Infraday, FERC, Washington DC, USA, Otober 30 th, 2015 1 Export Taxes as a Tool of Climate Change Mitigation Problem: High and inreasing global demand for oal high CO 2 emissions No global limate regime that would impose a ap on CO 2 emissions Question: how to redue CO 2 from oal demand? Unilateral limate poliy (e.g. EU-ETS) may lead to arbon leakage ( demand world prie onsumption in other regions) Supply side poliies to takle the soure (Sinn 2008, Haftendorn 2012, Harstad 2012) Here: Analysis of supply restritions of oal (e.g., via an export tax) Generation of tax revenues, improvement of the terms-of-trade, and redution of worldwide CO 2 emissions Short-term and long-term reations of interest!!! 2 2
1 Fous on Steam Coal and Major Exporters World steam oal seaborne trade in 2012: 967 Mt Australia 16.5% of exports Poland 5 31 Kazakhstan Russia 116 USA 51 South Afria 74 380 Indonesia 159 Australia 82 Colombia Australia: Major exporter with impat on world prie + limate hange awareness (?!) 3 Soure: own illustration based on IEA, 2013. Coal Information 3 Agenda 1.Motivation 2.A Two-Level Game: Methodology and the Model 3.Results Australian Export Tax vs. Coalition 4.Disussion of Limitations 5.Conlusions & Next Steps 4 4
2 Setting-Up a Two-Level Game as an Mathematial Program with Equilibrium Constraints (MPEC) The Upper Level ountry that takes the market reation into aount (lower level) Deision variable: (starting value) of an (energy based) export tax Maximization of the NPV of tax revenues 5 5
2 Setting-Up a Two-Level Game as an Mathematial Program with Equilibrium Constraints (MPEC) The Upper Level ountry that takes the market reation into aount (lower level) Deision variable: (starting value) of an (energy based) export tax Maximization of the NPV of tax revenues 7 7
2 Example: A Produer s Optimization Problem (td.) s.t. the following onstraints: Prodution apaity onstraint Maximum annual investment in prodution apaity onstraint Reserve onstraint Transport apaity onstraint To onsumption node To exporter Maximum annual investment in prodution apaity onstraint Maximum annual investment in prodution apaity onstraint 9 9 2 Example: An Exporter s Optimization Problem Eah exporter maximizes its disounted profits s.t. to onstraints: Maximum export apaity onstraint Maximum annual investment in export apaity onstraint 10 10
2 Solution Tehniques for MPECs in GAMS There exist different solution tehniques for MPECs (with pros and ons) NLPEC (ommerial) GAMS solver Lower level formulated by means of Karush-Kuhn-Tuker onditions as a Mixed Complementarity Problem (MCP) Pro: fast solve Con: opaque, only loal optima 11 11 2 NLPEC Lower Level Karush-Kuhn-Tuker Conditions Example: omplementarity onditions for exporters optimization problem with respet to I. II. III. 12 12
2 Solution Tehniques for MPECs in GAMS There exist different solution tehniques for MPECs (with pros and ons) NLPEC (ommerial) GAMS solver Lower level formulated by means of Karush-Kuhn-Tuker onditions as a Mixed Complementarity Problem (MCP) Pro: fast solve Con: opaque, only loal optima Disjuntive Constraints in MIP formulation (based on Gabriel and Leuthold, 2010) Conversion of omplementarity onditions to disjuntive onstraints (binary variables plus large numbers) Disretized tax rate to avoid bilinear term (tax*quantity) Pro: global optimum Con: hoie of large numbers, disretized tax 13 13 2 MILP Upper Level Linearized Objetive funtion Rewrite the objetive funtion: Define a set of exogenous tax rates Relate them to binary variables The optimal tax rate (of given ones) is hosen by setting the value of one binary variable to unity 14 14
2 MIP Lower Level Disjuntive Constraints Rewrite the lower level: Replae omplementarity onditions by disjuntive onstraints Continued Example omplementarity onditions for exporters optimization problem with respet to Where is a suffiiently large number to ensure the omplementarity 15 15 2 The Setting Represented ountries by type: Soure: Adapted from Holz et al. 2015 40 onsumption nodes (C), 25 produers (P), and 14 exporters (E) Multi-period model with yearly equilibria in 5-years-steps from 2010 to 2035 Base Case: New Poliies Senario of World Energy Outlook 2012 (IEA, 2012) Inreasing oal onsumption over time (20% until 2035); Dominant onsumers: China and India; inreasing exports of the USA 16 16
Agenda 1.Motivation 2.A Two-Level Game: Methodology and the Model 3.Results Australian Export Tax vs. Coalition 4.Disussion of Limitations 5.Conlusions & Next Steps 17 17 3 Case Australian Export Tax Four partial effets on the mass balanes relative to the Base Case: 1. Australian exports are redued 2. Australian domesti onsumption is inreased 3. RoW prodution is inreased Exporting ompetitors inrease their supply Importing ountries inrease domesti prodution 4. RoW onsumption is redued 18 18
3 Case Australian Export Tax Tax Setter: Australia Tax Type: Export Tax Disount Rate: 5% Annual growth rate of tax: 2.5% Initial Tax Rate: 0.66 USD/GJ (18 USD/ton of Australian oal, 6.7USD/tCO 2 ) NPV Tax Revenues: 16 bn. USD Figure 2: Time paths of the export tax rate and resulting tax revenues 19 19 3 Case Australian Export Tax - Global Impat Figure: Change in exports and prodution for domesti onsumption relative to the base ase, in Mt. 20 20 Unilaterally redued Australian prodution is largely ompensated for (leakage of 70%) USA, Russia and Indonesia substitute Australian exports Domesti prodution inreases esp. in China and India Volumes of seaborne trade are redued by 40-50 Mt per year Prie effet only in 2015
3 Case Export Tax Coalition Initial Tax Rate: 0.99 USD/GJ (10.1USD/tCO 2 ) NPV Tax Revenues: 125 bn. USD AUS NPV Tax Revenues: 16 bn. USD Tax Setter: Australia, Colombia, Indonesia and South Afria Tax Type: Export Tax Optimal tax level Disount Rate: 5% Annual growth rate of tax: 2.5% 21 21 Figure 2: Time paths of the export tax rate and resulting tax revenues 3 Case Export Tax Set by Coalition Global Impat Figure: Change in exports, prodution for domesti onsumption and weighted onsumer prie, relative to the base ase, in Mt. Smaller leakage effet, larger redution in global onsumption Emissions redued by on average 200 Mt CO 2 per year Signifiant prie inrease due to export tax 22 22
3 Some Considerations on Sensitivity Export tax vs. Prodution tax Prodution tax onsistently yields higher optimal tax rates and higher tax revenue, but exploits domesti onsumers 100% dependent on domesti prodution Inlude additional oalition member: USA Optimal tax rate inreases by 20%, but US share of oalition tax revenue is very small ompared to others ollusion inentives and stability of oalition needs to be further examined Optimal tax rate is robust to different levels of the disount rate Optimal tax rate and NPV is sensitive to annual growth rate of tax Highest NPV is ahieved with growth rates between 0 and 2.5% per year 23 23 4 Short Disussion of Approah What we do take into aount: Prodution inreases of exporting ompetitors Substitution between domesti prodution and imports Endogenous apaity expansions What we do not / annot take into aount: Fuel substitution in partial oal model Only indiretly in demand funtion Hene, upper level of emissions redutions Retaliation of other exporters or importers Endogenous paths of tax rate Stability of oalition or distribution mehanism 24
5 Conlusions Two motives whih might justify an export tax on oal Rent extration (and terms-of-trade improvement) Climate hange mitigation Non-negligible Australian export tax based on tax revenue maximization Large leakage effets, small limate effet Short-term and long-term reations via investments Coalition poliy may lead to welfare inreases for exporters Prodution tax onsistently show higher tax level and high NPV, but Outlook & next steps Fous on rent distribution More elaborate upper level at the osts of solution tehniques? 25 25 Thank you for your attention. DIW Berlin Deutshes Institut für Wirtshaftsforshung e.v. Mohrenstraße 58, 10117 Berlin www.diw.de Editor Roman Mendelevith rmendelevith@diw.de 26
Figure: Optimal initial tax rates and NPV of tax revenues as a funtion of the growth rate of the export tax. 4 Case 1.1 Australian Export Tax Robustness Cheks Different disount rates: Relatively stable with same tax rates in a range of Different growth rates of the export tax: 27
3 Case Export Tax Coalition with USA Initial Tax Rate: 1.23 USD/GJ NPV Tax Revenues: 150 bn. USD AUS NPV Tax Revenues: 18 bn. USD Tax Setter: Australia, Colombia, Indonesia, South Afria, and USA Tax Type: Export Tax Disount Rate: 5% Annual growth rate of tax: 2.5% Optimal tax level 29 29 Figure: Time paths of the export tax rate and resulting tax revenues 3 Case Prodution Tax Coalition Initial Tax Rate: 1.23 USD/GJ NPV Tax Revenues: 266 bn. USD Tax Setter: Australia, Colombia, Indonesia, and South Afria Tax Type: Prodution Tax Optimal tax level Disount Rate: 5% Annual growth rate of tax: 2.5% AUS NPV Tax Revenues: 36 bn. USD 30 30 Figure: Time paths of the export tax rate and resulting tax revenues
A2 Coalmod-Trade: Mathematial Formulation Profit Maximization of exporters s.t. osts and apaity onstraints: Sets Parameters Variables importing regions a interept of ost funtion p prie in region l l exporting regions b slope of ost funtion y export from l to DemInter b kl l l quality fator for oal trans _ tansportation ost l, interept of inverse demand funtion slope of inverse demand funtion l, min yl, 1 2 p y a kl y b kl y trans _ kl y l, l l l, l l l, l, l l, 2 st. kl y ex _ ap l l, l p DemInter b y l, l 31 31 A2 Disjuntive Constraints Formulation Upper Level Problem as Revenue Maximization max tax _ revd tax _ rev d tax _ rev K _ rev x d Lower Level: Initial onstraints L y l, d tax _ rev y tax _ dis xd 1 DemInter b y a kl b kl y d 2 l, l l l l l, l trans _ kl kl l, l l l taxl m 0 L ex _ ap kl y 0 l l l l, d m, d m, 32
A2 Disjuntive Constraints Formulation Lower Level: addtional disjuntive onstraints First Order Constraints: DemInter b y a kl b kl y Capaity Constraints: 2 l, l l l l l, l trans _ kl kl r_y K _ y tax lm y 1 r _ y K l, l, l, l, l l l l, l, ex _ ap kl y r _ K _ l l l, l l 1 r _ K _ l l l 33