Macroeconomic Impacts of Sectoral Approaches: The Role of the Cement Sector in China, Mexico and Brazil

The notion of sectoral approaches – in which developing and emerging economies are incentivized to undertake efforts to reduce greenhouse gas emissions intensity or growth in key industrial sectors, potentially with assistance from developed countries – play an important role in the debate on how to bring the globe on a lower greenhouse gas emissions path. Most countries expressed preferences for one or another form of sector-specific actions and sectoral coverage. If successful, so the supporters of this mechanism, it could set incentives for a broader participation of developing countries in a post-Kyoto regime and open up further potential for low cost mitigation. The paper explores impacts of sectoral approaches as a set of options to engage emerging economies in setting policies for a lower emissions path and to address possible adverse impacts of stringent environmental policies on key energy-intensive industries in the European Union and emerging economies. Drawing on the example of the cement sector, the paper analyses alternative designs of sectoral approaches and the impact of these policy designs on macroeconomic and sectoral indicators in the European Union as well as China, Mexico and Brazil.For the analysis we use a coherent economic modeling framework based on the computable general equilibrium (CGE) model PACE (Policy Analysis based on Computable Equilibrium). The contribution of this paper is threefold: Employing a large-scale computable general equilibrium model of the global economy, we (i) extend the sectoral disaggregation of the GTAP 7 database towards the inclusion of a cement production sector, (ii) introduce the bottom-up marginal abatement cost curves from the sectoral studies in China, Mexico and Brazil to (iii) numerically analyze the macroeconomic and environmental implications of alternative designs of sectoral approaches. The main data source underlying the PACE model is the GTAP 7 database which represents global production and trade data for 113 regions and 57 sectors for the base year 2004. This database does not provide sufficient detail at the sectoral level for the envisaged analysis of sectoral approaches in the cement sector. We therefore perform a sectoral disaggregation of the GTAP 7 database using SplitCom (Horridge, 2005 & 2008). Based on additionally collected data, we disaggregate all relevant values of the underlying database – such as production, trade, primary and intermediate inputs including energy inputs, and final use – at the sectoral level for all model regions and balance the extended GTAP 7 database with the newly added sectors. We then use the PACE model to perform simulation analyses. The scenarios combine alternative regimes of sectoral approaches for the cement sectors in China, Mexico and Brazil. They represent either unilateral situations corresponding to bottom-up country commitments or sectoral crediting, i.e. developing countries are allowed to sell certified emission reductions into an existing carbon market.The overall level of EU welfare losses from environmental regulation for the EU-27 is moderate across all scenarios. Sectoral output losses are reduced in the scenarios containing sectoral approaches. This is due to a lower CO2 price in the EU ETS as the countries subject to sectoral approaches are endowed with emission certificates. In addition, due to the possibility for these countries to sell certificates in the EU ETS, emission reductions in the EU-27 decrease which results in lower output losses in the energy intensive industries. Also in China welfare losses are moderate if the local cement sector commits to specific reduction targets. The possibility to sell emission certificates for the reduction efforts in the cement sector neutralizes adverse welfare effects which arise in the unilateral scenarios. This setup corresponds to a financial transfer from the EU to China that supports emission reduction efforts. Therefore, abatement can be achieved at lower efficiency costs than in the unilateral scenarios. The quantitative results for Mexico and Brazil differ slightly due to the smaller size of the sector in these economies and due to higher marginal abatement costs in these countries but remain valid in terms of qualitative aspects. The impact of emission reductions in the cement sectors in China, Mexico and Brazil on the worldwide emissions level is moderate. This is mainly due to the fact that carbon now leaks to regions and sectors that are not covered by an environmental regulation. Our results suggest that sectoral approaches can contribute to the reduction of global emissions, albeit to a small extent. This calls for the extension of sectoral approaches to further sectors and countries in order to fully exploit the efficiency gains.