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Nic Rivers Presentation - The Porter Hypothesis at 20: Can Environmental Regulation Enhance Innovation and Competitiveness? June 2010
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Nic Rivers Presentation - The Porter Hypothesis at 20: Can Environmental Regulation Enhance Innovation and Competitiveness? June 2010

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Session 3: Drilling Down: Evidence from Empirical Studies on Climate and Energy …

Session 3: Drilling Down: Evidence from Empirical Studies on Climate and Energy

Nic Rivers

Published in: Technology, Business
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  • 1. Climate policy and competitiveness: A North American perspective from CGE models Nic Rivers Porter Hypothesis at 20 Symposium Montreal, June 27-28, 2010
  • 2. Computable general equilibrium models are widely used
    • Much applied research exploring climate change policy, competitiveness, and leakage is conducted using computable general equilibrium models with a significant level of commodity detail
    • Example 1 – several high-profile studies attempted to estimate the impact of HR.2454 (Waxman-Markey) on US economic output and competitiveness:
      • FFEAT model used by EPA/EIA interagency report (2009)
      • ADAGE and IGEM models used by EPA (2009)
      • EPPA model used by MIT (2009)
      • NEMS model (hybrid) used by EIA (2009)
    • Example 2 – several studies attempt to estimate impact of proposed policies on Canadian economic output and competitiveness:
      • Dissou et al. (2003), Dissou (2005, 2006)
      • Wigle (2001)
      • Böhringer and Rutherford (2010)
      • Rivers (2010)
      • CGE models are run by Finance Canada and Environment Canada
  • 3. Typical findings: climate change policy and competitiveness
    • Market-based climate policy is likely to increase production costs for certain energy-intensive industries. This will reduce international competitiveness of these industries.
    • The process for allocation of allowances – auction, grandfathering, or output-based – can have significant impacts on international competitiveness
    • Non energy-intensive sectors may experience reduced costs via general equilibrium effects (e.g., reduced input costs due to lower demands)
  • 4. Competitiveness impacts of HR.2454 in the US Source: Interagency Report on HR.2454, 2009 US$20/tCO2 allowance price Impact of allowance distribution
  • 5. Competitiveness impacts of 20% reduction in GHG by 2020 in Canada Source: Rivers, 2010, Energy Economics . Impact of allowance distribution $100/tCO2 allowance price
  • 6. CGE models and the Porter Hypothesis
    • Most disaggregate applied CGE models do not currently represent policy-induced innovation well.
    • Innovation is typically exogenous (AEEI or backstop technologies) or is limited to a very small portion of the economy (electricity generation)
    • Models with a detailed representation of innovation (research and development, learning by doing, spillovers, crowding out, etc.) are typically too aggregated to be used for applied analysis of policies and competitiveness
    • In most applied policy models, the Porter Hypothesis is ruled out by assumption
  • 7. Is this a problem?
    • In climate change policy, competitiveness concerns are most prevalent for energy-intensive and trade-exposed industries
      • Primary aluminum: 22% energy intensity
      • Chlorine and alkalies: 24%
      • Flat glass: 16%
      • Lime: 23%
    • Because of high energy costs, these industries invest substantially in energy efficiency, audits, training, personnel, etc.: energy decisions may be “close” to rational
      • E.g. all steel mills and petroleum refineries in Canada participate in a “benchmarking” study to understand their full process energy efficiency compared to other plants and a hypothetical state of the art plant
    Source: Interagency Report on HR.2454, 2009

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