Pollution Control, Competitiveness, and Border Tax Adjustment

This paper explores in a general equilibrium framework the welfare and sectoral implications of an optimally designed system of border tax adjustments (BTA) on the imports of energy-intensive industries. Recently, several propositions have been made by policy makers and researchers to use BTA as a restrictive trade policy instrument to address the loss of competitiveness induced by unilateral stringent domestic pollution control policies. In this paper, we define the loss of competitiveness not as a loss of output by domestic energy-intensive producers, but instead as a loss of their market shares. We argue and we show using the Canadian economy as illustration that the most often proposed BTA, which is based on the carbon embodiment of the import good, may under- or over-achieve the objective of addressing the competitive disadvantage of domestic energy-intensive industries. In some cases, the proposed BTA may over protect the domestic energy-intensive industries by providing implicit subsidies as they might even increase their production in the presence of carbon taxes. Similarly, the proposed BTA may fail to fully restore the competitiveness of domestic producers, vis-à-vis their foreign peers. We determine the optimal BTAs on imports that fully restore the competitiveness of domestic firms following unilateral stringent pollution control policies. The ‘optimal’ BTAs take into consideration the general equilibrium effects of the carbon tax and of the import charges on the prices of domestic goods. In most cases, the impact their impact on import prices is higher than in the previous case. As a consequence, they entail higher distortions on resource allocation in the economy and hence higher welfare cost to households.Border tax adjustment, competitiveness, energy-intensive industries, general equilibrium, Canada.

Energy Substitutability in Canadian Manufacturing: Econometric Estimation with Bootstrap Confidence Intervals

This study provides estimates of the price and Morishima substitution elasticities between energy and non-energy inputs in two Canadian energy-intensive manufacturing industries: Primary Metal and Cement. The elasticities are estimated using annual industry-level KLEM data (1961- 2003) and relying on two flexible functional forms: the Translog and the Symmetric Generalized McFadden (SGM) cost functions. In addition to the point estimates, the confidence intervals of the elasticities are computed using single- and double-bootstrap resampling techniques. For both industries, the estimation results suggest that capital, labour, material and energy are pairwise substitutes and that energy is the most substitutable input. However, the low magnitudes of the estimated elasticities do not seem to offer great flexibility to these industries to adapt to high increases in energy prices.Energy; Elasticity of substitution; Translog cost function; Symmetric Generalized McFadden (SGM) Cost Function; Single Bootstrap; Double Bootstrap.

Regionalization and Labour Market Rigidities in Developing Countries: A CGE Analysis of UEMOA

In this study, we analyse the impact of the creation of a customs union among UEMOA (Western African Economic and Monetary Union)countries, with a special emphasis on the labour market structure. The implementation of the customs union reform will translate in most of these countries, into a greater openness, even with third party countries. This greater openness raises concerns in these countries as regards its potential impact on welfare, production and employment. In this study, in contrast to many other papers, we relax the assumption of a perfect functioning of the labour market. We consider the presence of a dualism in the labour market and the existence of a minimum wage for the formal workers. We use a multi-country and multi-sectoral computable general equilibrium model (CGE) to assess the impact of the reform. We find that the presence of a minimum nominal wage for the formal workers may significantly reduce the gains stemming from the customs union reform. Our simulation results indicate that the costs induced by this rigidity may exceed 45%, in some cases, in terms of the reduction in the welfare gains obtained without rigidity.Economic integration, Customs union, Labor market, Dualism, Wage rigidity

Household Incidence of Pollution Control Policies: a Robust Welfare Analysis Using General Equilibrium Effects

This study assesses the incidence of pollution control policies on households. In contrast to previous studies, we employ an integrated framework combining a multisector general equilibrium model with a stochastic dominance analysis using household-leved data. We consider three policy instruments in a domestic emission trading system: (i) an output-based allocation of permits (OBA); (ii) the use of the proceeds of permit sales to reduce payroll taxes (RPT); (iii) and the use of these proceeds to reduce consumption taxes instead (UCS). The general equilibrium results suggest that the return to capital is more negatively affected than the wage rate in all simulations, since polluting industries are capital intensive. Abstracting from pollution externalities, the dominance analysis allows us to conclude that all three policies have a normatively robust negative (positive) impact on welfare (poverty). Formal dominance tests indicate that RPT first-order welfare dominates OBA over all values of household incomes. UCS also first-order poverty dominates RPT for any choice of poverty line below $CAN 18,600, and poverty dominates for any poverty line (and thus welfare dominates) at the second order. Finally, while the three pollution control policies do not have a numerically large impact on inequality (in comparison to the base run), statistical tests indicate that inequality increases significantly more with OBA and RPT than with UCS.Pollution control policies, household incidence, stochastic dominance, general equilibrium effects

Household Incidence of Pollution Control Policies: A Robust Welfare Analysis Using General Equilibrium Effects

This study assesses the incidence of pollution control policies on households. In contrast to previous studies, we employ an integrated framework combining a multisector general equilibrium model with a stochastic dominance analysis using household-level data. We consider three policy instruments in a domestic emission trading system: (i) an output-based allocation of permits (OBA); (ii) the use of the proceeds of permit sales to reduce payroll taxes (RPT); (iii) and the use of these proceeds to reduce consumption taxes instead(UCS). The general equilibrium results suggest that the return to capital is more negatively affected than the wage rate in all simulations, since polluting industries are capital intensive. Abstracting from pollution externalities, the dominance analysis allows us to conclude that all three policies have a normatively robust negative (positive) impact on welfare (poverty). Formal dominance tests indicate that RPT first-order welfare dominates OBA over all values of household incomes. UCS also first-order poverty dominates RPT for any choice of poverty line below $CAN 18,600, and for any poverty line at the second order. Finally, while the three pollution control policies do not have a numerically large impact on inequality (in comparison to the base run), statistical tests indicate that inequality increases statistically more with OBA and RPT than with UCS.Pollution control policies; household incidence; stochastic dominance; general equilibrium effects.

External review of IDRC's Globalization, Growth and Poverty Program Initiative : final report

This review assesses the extent to which the Globalization, Growth and Poverty Program initiative (GGP) is meeting its objectives and aims; evaluates how risks to the achievement of the program objectives were identified and managed; and identifies any evolution in objectives. The program fills a distinctive institutional niche. International experts agree that much of the research on competition and development would not have occurred without IDRC’s early lead in creating a global pool of Southern and Northern researchers working together. Few Northern donors have a mandate to fund rigorous economic research on the South, in the South, and primarily for the South

How Much Does Geography Deflect Services Trade?

Abstract We estimate geographic barriers to trade in nine service categories for Canada's provinces from 1997 to 2007 with novel high quality bilateral provincial trade data. The border directly reduces average provincial trade with the US relative to interprovincial trade to 2.4% of its borderless level. Incorporating multilateral resistance reduces foreign trade relative to interprovincial to 0.1% of its frictionless potential. Geography reduces services trade some 7 times more than goods trade overall. Surprisingly, intra-provincial (local) trade in services and goods is equally deflected upward, implying that the border increases interprovincial trade much more in services than goods. JEL Classification Codes: F13, F14, F1

Oil price shocks: Sectoral and dynamic adjustments in a small-open developed and oil-exporting economy

The recent uptrend in oil prices represents both an opportunity and a challenge for small-open developed and oil-exporting countries. Using Canada as a study case and in contrast to most studies that use aggregate models, this paper employs a multi-sector, intertemporal general equilibrium model to provide perspectives on the sectoral, aggregate and dynamic adjustments of a sustained increase in oil prices. It highlights the transmission channels through which the rise in oil prices affects the domestic economy. The simulation results suggest that the shock would have positive aggregate impacts, but would also spur the reallocation of resources and would therefore induce disparities in sectoral adjustments. The suggested contraction in some industries could not however be attributed to a pure Dutch disease phenomenon because of, among other factors, the cost-push effect induced by the increase in oil prices.Oil prices Dynamic general equilibrium model Canada

Regional Burden Sharing of Carbon Mitigation Cost and Output-Based Allocation of Emissions

The issue of fair burden sharing among countries or regions is at the core of discussions surrounding the implementation of environmental agreements. In the context of a decentralized political system within a federal country, asymmetrical profiles of regional industries may hinder a regional consensus on implementing international environmental agreements. Besides, output-based allocation (OBA) of free permits to firms has been suggested by several authors as a solution to the uneven sectoral distribution of abatement costs in a given economy, at the expense of a high marginal abatement cost though. This paper examines the implications of providing more free permits to the most emissions-intensive region within a politically decentralized federation in the context of an OBA scheme. It develops a two-region multisector intertemporal general equilibrium model with an application to the Canadian economy. The simulation results suggest that the regional permit allocation scheme does have an impact on efficiency in an OBA context. When more permits are given to the most emissions-intensive region in an OBA scheme, the marginal abatement cost is higher and more distortions are introduced into the economy. The most emissions-intensive region is hurt more than the less-emissions-intensive region, which benefits from resource reallocation and the substitution towards the non-energy-intensive industry