Ying Fan , Lei Zhu, Ming-Lei Liu

1. Impacts of Energy Policies on China’s Energy Demand and Carbon Emissions: A Study using DEMETER-China Model Ying Fan,Lei Zhu, Ming-Lei Liu Center for Energy and Environmental Policy research, Institute of Policy and Management, Chinese Academy of Sciences

2. Outlines • Background • Literature Review • Model Specification for DMETER-China • Calibration and Scenarios • Results • Conclusions

3. Background • Along with the remarkable economic growth, a rapid increase has emerged in China’s energy consumption, in which fossil fuels, especially high-carbon fuels such as coal, account for a dominating proportion. In 2008, fossil fuels account for 91.1% with coal accounting for 68.7% of total primary energy consumption in China equivalent to 2850 Mtce (Million tons of coal equivalent), with GHG emissions arising from fossil fuel consumption containing approximately 1.8 billion tons of carbon. • The national plan has been proclaimed by the Chinese government to reduce the carbon emission intensity in 2020 by 40%~45% compared with the level of 2005 and to increase the proportion of non-fossil energy in the total primary energy consumption to 15% by 2020. • It is great efforts that China is obliged to make in developing non-fossil energy as well as improving energy efficiency. Chinese government will use many policy tools, especially economic tools such as carbon tax.

4. Literature Review • Two kinds of modeling approaches: bottom-up vs. top-down models • Bottom-up: MARKAL, ETA, MESSAGE • Top-down: MACRO, DICE&RICE, DEMETER • In the research of China’s energy and climate policy research • Zhang (1995, 1998) combinined a recursive dynamic CGE model with a MARKEL model and analyzed the macroeconomic effects of implementing carbon tax in China. • Chen (2005) used China MARKAL-MACRO to generate China’s reference scenario for future energy development and carbon emissions through the year 2050. • Liang et al.(2007) established a CGE model and analyzed the impact of different carbon tax schemes on the energy- and trade-intensive sectors.

5. DEMETER model • Gerlagh and van der Zwaan have proposed the DEMETER (DEcarbonisation Model with Endogenous Technologies for Emission Reduction) with consideration of learning effect and niche markets (van der Zwaan et al. 2002; Gerlagh and van der Zwaan 2003, 2006; Gerlagh et al. 2004). DEMETER can be used to study global future economic output, energy consumption and carbon emissions and evaluate the impacts of different reduction policies on economic • A well-established DEMETER-China model is employed in this study to exhibit the analysis of the impacts of carbon tax on future economic output, energy consumption and portfolio, and carbon emissions in China

6. Key features of DEMETER-China

7. Model Specification for DMETER-China • The model distinguishes one representative consumer, four representative producers (also referred to as sectors), and a public agent (that is the central government) that can set emission taxes to mitigate carbon dioxide emissions. Figure1. DEMETER-China schematic overview of flows

8. Balance equation

9. The representative consumer

10. The final good producer

12. Energy producers

14. Technological change

15. Parameters and data in DEMETER-China

19. Scenarios

20. The revolution path of carbon emissions, expressed in 100 million tons of carbon per year • Under BAU, carbon emissions would increase at an average rate of 3% by 2030 (after 2030 the increase rate gradually declines), and reach its peak with 3890 million tons of carbon in 2040 after which carbon emissions start to decrease • Under the same carbon tax level, carbon emissions under exogenous technological change are greater than under endogenous technological change (compare S1 with S4, S2 with S5 and S3 with S6).

21. Total energy consumption (as the difference relative to BAU) • After around 2035 (when the lowest energy demand is reached, compared to BAU), energy savings become less important in all policy scenarios, the origin of which is that, as a result of increased learning, the price of the new energy technology has substantially decreased. It becomes then more attractive to switch between the energy technologies, than to reduce total energy consumption

22. The evolution of the share of the new energy (as a percentage of total energy comsumption) • Carbon tax would promote the development of the new energy technology. The higher the carbon tax level is, the greater the share is. Moreover, the share under endogenous technical change is greater than under exogenous technical change when the carbon tax level is set equally

23. Investments in new carbon-free energy sector (as a percentage of GDP) • The initial investments under exogenous technical change is lower than under endogenous technical change (Compare S4 with S1, S5 with S2 and S6 with S3, over the first decades). • It may be concluded that investments in the new energy technology should not be delayed, even higher levels of immediate additional investments in the new erngy technology would have been appropriate

24. GDP (as the difference with respect to BAU) • Carbon taxed cause the initial decline of GDP, the higher the carbon tax level, the greater the decline, endogenous technical change could ease the negative impact of carbon tax. • The impact of carbon tax on GDP also become weak when plenty of new energy could be acquired at a lower cost in the future. Under exogenous technical change, however, the negative impact of carbon tax would last for a longer time.

25. Conclusions • The carbon emissions reach the peak value in about 2040 under BAU while carbon tax could reduce carbon emisions and bring the peak year ahead. Under BAU, carbon emission firstly increase quickly with the rate levelling off, then reach the peak year of 2040 after which emissions start to decrease. The higher the carbon tax level, the greater the carbon reductions. • Carbon taxes reduce energy consumption under both endogenous and exogenous technological change. For example, energy consumption under S3 is cut by 17% in 2025 and by 5% around 2050. The other scenarios present similar figures. After around 2035 (when the lowest energy demand is reached, compared to BAU), energy savings become less important in all policy scenarios. It becomes then more attractive to switch between the energy technologies, than to reduce total energy consumption.

26. When carbon tax is levied, more investments are required to increase the new energy capacity because more new energy is needed to replace fossil-fuel energy. Under S4-S6, when there is no learning-by-doing, the transition towards the new energy technology is deplayed as long as possible in order to postpone the associated costs. So the intial investments under exogenous technical change is lower than under endogenous technical change (Compare S4 with S1, S5 with S2 and S6 with S3, over the first decades). • Carbon taxed cause the initial decline of GDP, the higher the carbon tax level, the greater the decline, while endogenous technical change could ease the negative impact of carbon tax. Under both endogenous technical change scenarios S1-S3 and exogenous technical change S4-S6, with the carbon tax levels increasing, the intial GDP is cut back more seriously (under S6 the largest GDP loss could be 0.7%, compared with BAU). When there is learning-by-doing, the production cost of the new energy technology decreases.

27. References • Van der Zwaan, B., Gerlagh, R., Klaassen, G., Schrattenholzer, L., 2002. Endogeous technological change in climate change modelling. Energy Economics 24, 1-19. • Gerlagh, R., van der Zwaan, B., 2003. Gross world product and consumption in a global warming model with endogenous technological change. Resource and Energy Economics 25, 35-57. • Gerlagh, R., van der Zwaan, B., Hofkes, M.W., et al., 2004. Impacts of CO2-Taxes in an economy with niche markets and learning-by-doing. Environment and Resource Economics 28, 367-394. • Gerlagh, R., van der Zwaan, B., 2004. A sensitivity analysis of timing and costs of greenhouse gas emission reductions. Climate Change 65, 39-71. • Gerlagh, R., van der Zwaan, B., 2006. Options and instruments for a deep cut in CO2 emissions: carbon dioxide capture or renewables, taxes or subsidies? The Energy Journal 27 (3), 25-48. • Chen, W., Wu, Z., He, J.K., et al., 2007. Carbon emission control strategies for China: a comparative study with partial and general equilibrium versions of the China MARKAL model. Energy 32, 59-72.

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29. Q & A • Thanks for your attention! • Lei Zhu • Center for Energy and Environmental Policy Research (CEEP), Institute of Policy and Management, Chinese Academy of Sciences • Add: Siyuan Building, No.55 Zhongguancun East Road, Haidian District, Beijing, 100080, P.R.China • E-mail: lions85509050@gmail.com • http://www.ceep.cas.cn/en/ • http://english.ipm.cas.cn/ • http://www.cas.ac.cn/