Masaru Aoki (Japan Research Institute)

International Workshop for Interactive Analysis on Economy and Environment Cabinet Office, Government of Japan, 4 March 2006 Long-term, Multi-sectoral Model for Interaction on Economy and Environment of Japan Masaru Aoki (Japan Research Institute)

1. Model （1） Overview of the Long-term, Multi-sectoral Model • It’s the Dynamic utility optimization model (basically linear model). In this model, people get the utility from consumption only. • Economy has the multi-sector, and is also possible to have the several activities (substitutive activity) in each sector. Economy has the multi-sector, and is also possible to have the several activities (substitutive activity) in each sector. • It can be described the future technology as the change of the capital, labor input and intermediate inputs coefficients. • It’s assumed to be the perfect-foresight.

（1） Overview of the Long-term, Multi-sectoral Model • The several constraints can be introduced to this model, including the environmental ones. Thus, we can analyze the interaction between economy and environment. • We can analyze several cases of different environmental constraints and compare the results (GDP path and industrial structure etc) by using this model. • The results of the simulation are not characterized as • forecast. They are to be regarded as possible and desirable • states of economy which satisfy the economic constraints.

（2）Structure of the Model See “List of Equations Long-term Multi-sectoral Model” in detail. Production function each sector and activity ・labor ・capital (classified by goods) ・intermediate inputs (classified by goods) upper limit to CO2 Labor supply CO2 emissions optimal allocation ・sectors ・activities ・intertemporal Domestic products Intermediate inputs capital formulation utility (each term) Supply=demand (each goods) final consumption imports exports discount rate Balance of international payments Rate of change in the upper limit to imports Total Utility Imports price exports price Rate of change in the upper limit to exports Maximization Net external assets profit for net external assets ：exogenous variables Ｒeal profit ratio for net external assets Final value for net external assets

（3）Classification of Industrial Sectors and Goods

（4）Initial Data • The most of the data is based on Input-Output Matrix(2000). • Capital stock data is based on JIP（Japan Industry • Productivity ） Database created by Economic and Social • Research Institute (ESRI). • See Table1 – Table 9 in detail.

（5）Common setting • 1 term = 5 years. We make the simulation through the 10 terms(2001-2050). • We assume the only labor productivity is increasing in the • future (ie. rate of labor inputs coefficient is decreasing.) See • Table 8. Intermediate inputs and capital coefficient are no- • changed. • Total CO2 emissions = emissions from final consumption + emissions from the intermediate input of fuels • ALFA(t) and BETA(t,j,i) are CO2 intensity, which are calculated from • Japanese NAMEA’s Data(2000). See table 9. Both are constant over • term. CO(t): N(t) = ALFA(t) × ΣD(t,k) + Σ Σ Σ BETA(t,j,i) × A(t,j,i) × VU(t,k,j,i) k=1k=1i=1j=1 (20)

（6）Business As Usual (BAU) setting • All sectors have only one activity. • No CO2 constraint. • The emissions trading system does not exist.

（7）Extensions • Based on the BAU case, we consider the following extensions. • 1) CO2 emissions constraint • i) imposing the normal CO2 constraint each term • ii) introducing the borrowing system • 2) Substitutive activities • i) introducing the energy‐saving activities to all the • sectors • ii) Electricity sector is divided into five activities which • have a different technology of power generation • iii) introducing the popularization of “the electric cars” • with “the hydrogen stations”

1) CO2 emissions constraint i) imposing the normal CO2 constraint each term CO2(t): Upper limit to CO2 emissions (1,000 tons of CO2/year) TM: Number of years for one period ; five years CT(t): N(t)  TM × CO2(t) (21-1) Domestic emissions  Upper limit to emissions • Upper limit CO2(t) is the target emissions level 1,126,000 thousand tons-CO2 (energy related CO2 plus CO2 from non energy sources) in 2010 from the Kyoto protocol . It’s constant over term.

1) CO2 emissions constraint ii) introducing the borrowing system • Under the borrowing system, if the CO2 emissions exceed each term limit of it, it’s no problem. In that case, it will be charged as penalty against excess amounts, and will be counted as next term CO2 emissions. • For example, under the normal CO2 emissions constraint, even if there exists the technology which could reduce large amounts of CO2 emissions, it would often be impossible to invest for the technology because investment will increase the CO2 emissions, and it would go beyond the limit. • However, under the borrowing system, it is possible to invest for the CO2 reducing technology, because the CO2 emissions constraint would be abated by the introduction of • the borrowing.

1) CO2 emissions constraint ii) introducing the borrowing system • The formulations of the borrowing system are as follows: ξis penalty 30% for 5 years (from COP 11 on December 2005). We assume that it’s constant over term. • Compared to (21-1), this case restricts to only the final term but allowed exhaustion of total CO2 emissions are equal to both case. • The model is changed from linear to nonlinear by this constraint, so that it’s harder to solve the problem technically. EQFL: FL(T) = N(T) - TM×CO2(T) ＋(FL(T-1)+ Max(FL(T-1),0) × ξ) Except for t = 1. (21-2-1) BR: FL(T) = 0 only t = Final period applies.(21-2-2)

2) Substitutive activities i) introducing the energy‐saving activities to all the sectors • The Energy‐saving activity (second activity) has the 10% smaller intermediate inputs coefficient of “Petroleum products” , “Coal product” and “Electricity”, compared to the first activity. • It also has the 10% smaller CO2 intensity, compared to first activity. • Capital and labor input coefficients of the second activity are the same as the first activity’s. • Second activity has no initial capital stock.

2) Substitutive activities ii) Electricity sector is divided into five activities which have a different technology of power generation • The five activities are “Coal”, “Crude oil”, “Natural gas”, “Nuclear power” and “Water and wind power”. • These also have the different intermediate inputs coefficient andCO2 intensity. The power generation of “Nuclear power” and “Water and wind power” don’t exhaust the CO2. See Table10 and 11. • Water and wind power generation have capacity constraints (refer to “Technology strategic map” Ministry of Economy, Trade and Industry, 2005) • Nuclear power’s share is given by the scenario (refer to “A Survey of the Energy Balance in 2030” Sogo Shigen Energy Chosakai, 2005). The share is the 0.32 until 2015, 0.47 after then.

2) Substitutive activities iii) introducing the popularization of “the electric cars” with “ the hydrogen stations” • The third activity of the “Road transport” sector is • “the electric cars”, which does not exhaust the CO2. • The intermediate inputs of them are the same as normal cars (first activity), except for the fuel to run. They need the hydrogen and hydrogen stations, instead of the petroleum products and the gas stations (adds the “hydrogen” and “hydrogen stations” to sector and goods). • We assume that the electric cars are not used until 2015 because it takes a long time to popularize such the innovative technology.

２．Simulation Analysis (1) Cases

（2） The Results i） Macro indicators

（2） The Results i） Macro indicators Total Utility

（2） The Results ii） GDP classified by industrial sectors

（2） The Results iii） Activities (Case3 and Case4) Case3(Energy-Saving Activity): Output

（2） The Results iii） Activities (Case3 and Case4) Case4(The electric cars): Output

3．Other Simulations • The emissions trading with normal CO2 • constraint case MXN BPP(t): Σ (E(t,k) M(t,k)) * P(t,k) = IZ(t) BCON + JZ(t) (13) K=1 CT(t): N(t) － CR(t) × J(t)  TM × CO2(t) (21-1)’ JZ(t): Value of net emission right purchase(\1 billion) CR(t): Conversion coefficient for the emissions trading (1,000 tons of CO2/\1 billion) • In this model, if emission right price is not so expensive (over 300,000yen), the result (GDP path) of this case is the almost same as BAU’s one by purchasing the emission right.

The emissions trading with normal CO2 • constraint case

The emissions trading with normal CO2 • constraint case • However, the required value of net emission right purchase in order to achieve almost same GDP path with BAU's is as follows: Case1: Emission right price = 3,000yen/ 1ton of CO2 Case2: Emission right price = 30,000yen/ 1ton of CO2

4．Concluding Remarks Issue for the future: • Colleting appropriate information about future technology and reflecting to capital, labor input and intermediate inputs coefficients. • Introduction to more environmental improved technology. • Try to reflect the energy-saving effects to the consumer (at this moment, energy saving is only reflecting to the production sector). • Updating and improving about the borrowing analysis.

Masaru Aoki (Japan Research Institute)