China Economic Review 24 (2013) 7794

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China Economic Review

Impacts of border carbon adjustments on China's sectoral emissions: Simulations with a dynamic computable general equilibrium model
Qin BAO a, Ling TANG b, ZhongXiang ZHANG c, d, e,, Shouyang WANG a
a b c d e

Center for Forecasting Science, Academy of Mathematics and Systems Science, Chinese Academy of Sciences, Beijing, China School of Economics and Management, Beijing University of Chemical Technology, Beijing, China Department of Public Economics, School of Economics, Fudan University, Shanghai, China Center for Energy Economics and Strategy Studies, Fudan University, Shanghai, China Institute of Policy and Management, Chinese Academy of Sciences, Beijing, China

a r t i c l e

i n f o

a b s t r a c t
Carbon-based border tax adjustments (BTAs) have recently been proposed by some OECD (Organization for Economic Co-operation and Development) countries to level the carbon playing field and target major emerging economies. This paper applies a multi-sector dynamic, computable general equilibrium (CGE) model to estimate the impacts of the BTAs implemented by the US and EU on China's sectoral carbon emissions. The results indicate that BTAs will decrease export prices and transmit the effects to the whole economy, affecting sectoral output and demand from both the supply side and demand side. On the supply side, sectors might move away from exporting towards the domestic market, thereby increasing sectoral supply, while on the demand side, the domestic income may be strikingly cut down due to the decrease in export price, decreasing sectoral demand. Furthermore, such shrinkage of demand may similarly reduce energy prices, which would lead to an energy substitution effect and somewhat stimulate carbon emissions. Depending on the relative strength of the outputdemand effect and energy substitution effect, sectoral carbon emissions and energy demands will vary across sectors, with increases, decreases or shifts in different directions. These results suggest that an incentive mechanism to encourage the widespread use of environment-friendly fuels and technologies will be more effective than BTAs. 2012 Elsevier Inc. All rights reserved.

Article history: Received 6 December 2011 Received in revised form 14 November 2012 Accepted 18 November 2012 Available online 27 November 2012 JEL classification: D58 F18 Q43 Q48 Q52 Q54 Q56 Q58 Keywords: Border carbon tax adjustments Computable general equilibrium model Carbon emissions

1. Introduction As an essential part of post-Kyoto international climate negotiations, carbon-based border tax adjustments (BTAs) have been proposed to level the playing field by the US, EU and other OECD (Organization for Economic Co-operation and Development) countries against countries without compatible emissions-reduction commitments, including China (Cosbey, 2008; Dong & Whalley, 2009a; Weber & Peters, 2009; Zhang, 2009, 2010b, 2010c, 2011). The US House of Representatives (2009) passed the American Clean Energy and Security Act of 2009 (HR2998) on June 26, 2009, in which a carbon-based border-adjustment provision was proposed to protect the competitive advantages of American producers against their competitors in countries without comparable emissions-reduction commitments. In the EU, the EC-commissioned High Level Group on Competitiveness, Energy and Environmental Policies proposed the BTA issue in its second report early in 2006. Moreover, BTAs have been

Corresponding author at: School of Economics, Fudan University, 600 Guoquan Road, Shanghai 200433, China. Tel.: +86 21 65642734; fax: +86 21 65647719. E-mail address: ZXZ@fudan.edu.cn (Z. Zhang). 1043-951X/$ see front matter 2012 Elsevier Inc. All rights reserved. http://dx.doi.org/10.1016/j.chieco.2012.11.002

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recommended as useful policy tools to protect the competitiveness of domestic industries in the EU (Asselt & Biermann, 2007; Monjon & Quirion, 2010, 2011a; Zhang, 2012b) and Canada (Rivers, 2010). BTA measures are actually not new topics (Lockwood & Whalley, 2008), and the related policies mainly concentrate on two issues (Babiker & Rutherford, 2005; Dong & Whalley, 2009b; Kuik & Hofkes, 2010; Monjon & Quirion, 2010; Zhang, 2012b). One issue is addressing concerns regarding competitiveness, providing offsets for producers from participating regions that take on the emissionsreduction commitments against producers from non-participating regions with low carbon-abatement costs. Therefore, BTAs are designed to charge imported goods the equivalent of what the producers would have had to pay had the goods been produced in the participating regions (Asselt & Brewer, 2010). The other issue is avoiding carbon leakage, i.e., that the carbon-emissions reductions in participating countries would increase emissions elsewhere as firms relocate (Babiker, 2005; Zhang, 2012b). BTAs are also believed to encourage more countries to participate in the global carbon emissions-reduction commitment (Droege, 2011). However, the legality of BTAs has raised great concerns, and some people have argued that BTAs be considered WTO-consistent only if they are carefully designed (Bhagwati & Mavroidis, 2007; Houser, Bradley, Childs, Werksman, & Heilmayr, 2008; Zhang, 1998c, 2004, 2009, 2010b, 2010c; Zhang & Assuno, 2004). A number of researchers have examined the impacts of BTAs and related policies. Most of the researchers have focused on the effectiveness of BTAs for protecting competitiveness and avoiding carbon leakage. No general agreement has been found to date. On the one hand, some researchers have argued that BTAs would have positive effects on environmental improvements and a competitive-disadvantage offset (Majocchi & Missaglia, 2002; Veenendaal & Manders, 2008). For example, Lessmann, Marschinski, and Edenhofer (2009) found the influences of carbon tariffs on international cooperation to be significantly positive. Ross, Fawcett, and Clapp (2009) suggested BTAs an effective method for US climate mitigation. Dissou and Eyland (2011) found that competitiveness would be hindered by BTAs in Canada. Monjon and Quirion (2011b) discussed the leakage-avoiding effect of the EU's BTAs. Gros (2009) found that BTAs would increase global welfare. Bhringer et al. (2010) studied the impacts of climate policies by the EU and US on the global economy and environment, and the results suggested that the climate policies would not necessarily cause damage to the targeted developing countries. On the other hand, some studies have concluded that BTAs would be ineffective either to increase domestic competitiveness or to improve the global environment (Dong & Whalley, 2009a,b; Elliott et al., 2010; Weber & Peters, 2009). For example, Fischer and Fox (2009) suggested that BTAs would be beneficial for domestic production but not be effective to reduce global emissions. McKibbin and Wilcoxen (2009) found a modest effect of BTAs to reduce leakage and to defend against import-competing industries without carbon costs. Kuik and Hofkes (2010) focused on the carbon leakage-avoidance effects of the EU Emissions Trading System and suggested that BTAs might reduce the sectoral leakage rate of the iron and steel industry, but the overall leakage-reduction effect was modest. While most of the existing studies focused on the effects of BTAs in developed countries, little attention has been paid to developing countries, especially China, the country that BTAs mainly target, either implicitly or explicitly. Most of the existing discussions about China are theoretical, and few numerical simulations have been carried out to extensively measure the quantitative impacts of BTAs on China (Shi, Li, Zhou, Yuan, & Ma, 2010; Zhang, 2010a,b). Some numerical studies that did consider China built global energy-economy models and just treated China as a nonspecific country with few detailed sectoral settings (Bhringer et al., 2010; Dong & Whalley, 2009a,b; McKibbin & Wilcoxen, 2009). However, as a rapidly growing developing country, China has been one of the largest sources of carbon emissions, with its share in global CO2 emissions increasing rapidly from 5.7% in 1973 to 22.3% in 2008 (Fredrich & David, 2008; IEA, 2010). China's share in the global total final energy consumption has more than doubled over the past 30 years from 7.9% in 1973 to 16.4% in 2008 (IEA, 2010). Furthermore, ever since 1978, China's economy has been growing rapidly, and this pattern is expected to continue in the near future. Such rapid development of the economy will inevitably increase China's energy demand and carbon emissions. The question is then raised regarding whether BTAs would lead China's industries to emit less carbon. Against this background, this study aims to analyze the impacts of the BTAs implemented by the US and EU on China's sectoral carbon emissions by using a recursive dynamic computable general equilibrium (CGE) model. The CGE model may be the most popular modeling tool for the assessment of energy and environment policies globally (Bhringer et al., 2010; Burniaux, Chateau, & Duval, 2011; Hbler, 2011; Kuik & Hofkes, 2010; McFarland, Reilly, & Herzog, 2004; Rivers, 2010; Ross et al., 2009; Shoven & Whalley, 1972; Xu & Masui, 2009; Zhang, 1998a,b). Compared with other policy-assessment methods, such as partial equilibrium analysis and inputoutput (IO) analysis, the CGE method is able to reveal the comprehensive relationships in the whole economy and conduct policy simulations under the assumption of general equilibrium. Moreover, detailed sectoral information, e.g., industrial prices and outputs, can be well characterized. China's CGE model has been widely used to analyze economy, energy and environmental policies (Fan, Liang, Wei, & Okada, 2007; He, Zhang, Yang, Wang, & Wang, 2010; Horridge & Wittwer, 2008; Liang, Fan, & Wei, 2007; Toh & Lin, 2005; Zhang, 1995, 1998a, 1998b). In this paper, a multi-sector CGE model including 7 energy sectors and 30 non-energy industrial sectors is developed and facilitates a detailed sectoral analysis. The model is calibrated based on data from the year 2007 and runs recursively to the year 2030. In the proposed model, a BTA module is specifically built to describe the border carbon tax imposed by the US and EU against China beginning in the year 2020. The rest of the paper is organized as follows. The recursive dynamic CGE model for China is described in Section 2. Data descriptions, model calibration and business-as-usual (BAU) simulation scenarios are presented in Section 3. Results about the impacts of BTAs on China's industrial emissions and the further analysis are reported in Section 4. Robustness analyses of the model are performed in Section 5. Section 6 provides some concluding remarks and policy implications.

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2. The model A recursive dynamic computable general equilibrium model is developed to evaluate the impacts of the BTAs imposed by the US and EU on China's industrial carbon emissions. 1 Our model is a modified version of the one proposed by Wu and Xuan (2002). In the model, industrial sectors are disaggregated into 7 energy sectors and 30 non-energy sectors based on the characteristics of energy intensity and export intensity, as shown in Table 1. The economic activities are categorized into four modules: production, international trade, income and expenditure as well as closures and dynamics. Additionally, a BTA module is designed to describe the BTAs imposed by the US and EU. The framework of the model is illustrated in Fig. 1, and the details are discussed in the following sub-sections. 2.1. Production module The output Xi,t of sector i (i denotes both the energy sectors and non-energy sectors) in period t is captured by a constant elasticity of substitution (CES) function, with a nested structure of five levels designed to represent different substitutions among a variety of inputs, as shown in the production module of Fig. 1. In the first layer, the fossil energy input FOSSILi,t of sector i in period t is composed of six types of fossil energy resources based on a CES function as described in Eq. (1).   1= f FOSSILi;t f ossilf af ossilf ;i FOSSIL F f ossilf ;i;t f 1

where f = 1/(1 f) denotes the elasticity of substitution among different fossil energy resources, and af ossilf ;i is the sharing parameters with f ossilf af ossilf ;i 1. Similarly, in the second layer, the energy input Energyi,t of sector i in period t is composed of the electricity ELEi,t and the fossil energy composite FOSSILi,t. In the third layer, the energy composite Energyi,t and capital Ki,t compose the capitalenergy input KEi,t, which is then combined into the capitalenergylabor input KELi,t with the labor input Li,t. All of these compositions follow CES technology. Meanwhile, the combined intermediate input TOTInti,t of each sector i in period t is composed of individual intermediate goods from different non-energy sectors using a Leontief function as described in Eq. (2). ! Int 1;i;t Int 2;i;t Int 30;i;t ; ; ; TOTInt i;t min 2 1;i 2;i 30;i where Intj,i,t (j = 1, 2, , 30) denotes the intermediate input of sector j (j denotes non-energy sectors only) to sector i in period t, and j,i is the inputoutput coefficient. In the last layer, the final output Xi,t of sector i in period t is composed of the total intermediate input TOTInti,t and the capitalenergylabor composite KELi,t with CES technology as described in Eq. (3).    1= x x X i;t a int;i TOTInt i;t x akel;i kel;i;t KELi;t 3

where x = 1/(1 x) is the elasticity of substitution between the total intermediate input and the capitalenergylabor composite. aint,i and akel,i are the sharing parameters with aint,i + akel,i = 1. kel,i,t is the total factor-productivity coefficient that captures the technology improvement. The optimal production strategies are derived from the minimization of the production costs at the given prices. 2.2. International trade module An Armington assumption (Armington, 1969) is used in the model such that the domestic goods and foreign goods are treated as imperfect substitutes for each other. The total domestic demand Qi,t (or the total domestic output Xi,t) is composed of the domestic goods Di,t and imports Mi,t (or exports Ei,t) using a CES function (or a constant elasticity of transformation [CET] function), as shown in Eq. (4) (or Eq. (5)).  1= m Q i;t am;i Mi;t m adm;i Di;t m   1=e X i;t ae;i Ei;t e ade;i Di;t e 4 5

where am,i and adm,i are the sharing parameters of imports and domestic goods, ae,i and ade,i are the shares of exports and domestic goods, respectively, with am,i + adm,i = 1 and ae,i + ade,i = 1. im = 1/(1 m) is the Armington elasticity between the domestic goods and imports, while ex = 1/(e 1) is the elasticity between the domestic goods and exports. The optimal importing strategy is derived by minimizing the costs PMi,tMi,t + PDi,tDi,t under the constraint described by Eq. (4). Similarly, the optimal exporting strategy is derived by maximizing the sales PEi,tEi,t + PDi,tDi,t under the constraint described by Eq. (5). PMi,t, PEi,t and PDi,t are the importing price, exporting price and domestic price of commodity i in period t, respectively.
1

The model documentation is available upon request.

80 Table 1 Codes of sectors (commodities). Code AGR M_C* M_O* M_G* MFM MNF MIN FOD TOB TEX FUR WOD PAP PRT OIL* COK* RCM MCM CMF
*

Q. Bao et al. / China Economic Review 24 (2013) 7794

Sectors (commodities) Agriculture Mining and washing of coal Extraction of petroleum Extraction of natural gas Mining and processing of ferrous metal ores Mining and processing of non-ferrous metal ores Mining and processing of nonmetal ores Manufacture of foods and beverages Manufacture of tobacco Manufacture of textiles Manufacture of textile-apparel, leather, fur, and related products Processing of timber; manufacture of wood, bamboo, rattan, palm and straw products; manufacture of furniture Manufacture of paper and paper products Printing and reproduction of recording media; manufacture of articles for cultural, educational and sport activities Processing of petroleum Processing of coke Manufacture of raw chemical materials and chemical products Manufacture of medicines Manufacture of chemical fibers

Code RUB CEM GLS NMM STL NFR MET EQP TRM EEQ CUM OTM ELE* GAS* WTR CNS TRP OSR

Sector (commodities) Manufacture of rubber and plastics Manufacture of cement, lime and gypsum Manufacture of glass Manufacture of non-metallic mineral products Smelting and pressing of ferrous metals Smelting and pressing of non-ferrous metals Manufacture of metal products Manufacture of general and special purpose machinery Manufacture of transport equipment Manufacture of electrical and electronic equipment Manufacture of measuring instruments and machinery for cultural activities and office work Other manufacturing Production and supply of electric power and heat power Production and supply of gas Production and supply of water Construction Transportation, storage, post telecommunication and other information-transmission services Other services

Energy sectors (commodities).

As shown in Fig. 1, the imports are composed of the imports from the US, EU, Japan (JAP) and the rest of the world (ROW) using a CES function, and the exports are composed of the exports to the US, EU, JAP and ROW using a CET function. The optimal importing strategy and exporting strategy are derived in a similar way. Because China has increasing power in price determination, the large-country assumption is used here, in which other regions' export and import prices are likely to be influenced by changes in China's international trade rather than fixed world prices. However, the small-country assumption is also considered for comparison. This pricing mechanism will be presented later in the BTA module. 2.3. BTA module The BTAs will be imposed by the US and EU against China based on the carbon emissions embodied in exports. As specified in the American Clean Energy and Security Act, the BTAs will also include rebates for the US energy-intensive, trade-sensitive sectors and free emission allowances to help avoid putting US manufacturers at a disadvantage relative to overseas competitors.

BTA Module
US EU ROW

labor income income International Trade module import M

capital income

transfer income

capital income income enterprises expenditure

transfer income

total border carbon tax

households expenditure

export E
border carbon tax adjustments rate carbon emissions of exports

domestic commodity D

im
consumption Armington commodity Q

income tax

saving

transfer payment

income tax

saving

ex
output X

Income-expenditure Module Production Module composite goods of capital-energy-labor KEL intermediate input TOTINT 30 non-energy commodities labor income YL factors capital CAP capital income YK total capital

kel

composite goods of capital-energy KE

Investment labor LAB

ke

consumption expenditure

transfer payment

saving

export rebate

Closure & Dynamics Module

7 energy commodities

composite goods of energy ENERGY

government composite goods of fossil energy FOSSIL

e
electricity ELE income indirect tax COK GAS tariff income tax enterprise tax transfer income

f
M_C M_O

M_G

OIL

Fig. 1. Framework of the dynamic CGE model for China.

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However, in this paper, the rebates by the US and EU are not considered because they are better addressed using a multi-country, global model. All other factors being equal, when the rebates for the US exports are included, the impacts of BTAs on China's economy will theoretically be larger. Under the accounting rules of the Intergovernmental Panel on Climate Change (IPCC), all of the greenhouse-gas emissions and removals are based on in-country production emissions (Davis & Caldeira, 2010; Zhang, 2011, 2012a). Therefore, this study is based on this territorial-based emissions-accounting system, which would avoid double counting of carbon emissions. That is, China's exporters in each sector should be responsible only for the carbon emissions generated during their production, while the indirect emissions stemming from intermediate inputs that are produced by other sectors are not considered. As recommended by the IPCC (2006), carbon emissions are calculated based on the use of fossil energy with corresponding conversion factors, as described in Eq. (6).
6 X

af bf cf Fossilf ;i;t X i;t 6

Cei;t

f 1

where Cei,t denotes the carbon emissions per unit product of sector i in period t, and Fossilf,i,t denotes the demand for primary energy f of sector i in period t, where f includes six fossil energy sources, i.e., the mining and washing of coal (M_C), extraction of petroleum (M_O), extraction of natural gas (M_G), processing of petroleum and nuclear fuel (OIL), processing of coke (COK) and production and supply of gas (GAS), as shown in Fig. 1. af, bf and cf are the conversion factor, the emissions factor and the fraction of oxidized carbon of energy f, respectively. Two methods are widely used to calculate the emissions embodied in trade: one is based on producing countries' carbon emissions, and the other is based on BTA-collecting countries' carbon emissions. However, neither of the methods is ideal because simply assuming that either all of the imports produced using Chinese domestic technologies or all of the Chinese exports produced using BTA-collecting countries' technologies may overestimate or underestimate China's CO2 emissions embedded in trade because this approach fails to capture potentially large national differences in technology levels across trading partners (Zhang, 2012a). In this paper, because we use a single country CGE model and due to a lack of proper data, we focus on the former assumption to make the BTA policy transmission more clear. Because sectoral carbon emissions are from burning fossil fuels, we calculate both the direct carbon emissions and total carbon emission in each sector. Sectoral direct carbon emissions (CO2) are from primary energy use, while total carbon emissions (TOTCO2) are sectoral carbon emissions from both primary and second energy use. The latter includes the indirect emissions from the fossil-fuel use to generate the electricity used in this sector. The carbon border tax is then calculated by multiplying the sectoral embodied carbon emissions by the tax level. When the BTAs are imposed, each production sector in China will have to pay an additional carbon-emissions cost for its commodities exported to the foreign regions that impose the BTAs. China's exporting prices to the regions with BTAs are described in Eq. (7), while those to other regions are shown in Eq. (8).   1esubi;t PXEs;i;t btas;t Cei;t PWEs;i;t   1esubi;t PXEs;i;t PWEs;i;t 7 8

where PXEs,i,t is the export price of commodity i to the region s in period t, esubi,t is the export rebate rate of commodity i in period t provided by China's government, PWEs,i,t is the adjusted world-export price of commodity i in period t, and btas,t is the carbon border tax rate of the region s in period t. Hereby, s denotes the US and EU in Eq. (7) and denotes JAP and ROW in Eq. (8). As mentioned above in the international trade module, the large-country assumption is used to depict the export behaviors of China's enterprises. Under this assumption, since China plays a significant role in the international trade market, its willingness to trade has much power in driving world export and import price settings. Therefore, China's export prices faced by domestic producers will be influenced by both BTAs and their willingness to trade. 2.4. Income and expenditure module The income and expenditure of different agents are illustrated in Fig. 1. There are four types of agents, including enterprises, households, the national government and foreign countries. Enterprises gain their income from returns of capital and government transfers. After paying income tax to the government and transferring some of the income to households, enterprises make their savings. Households gain their income from labor income, returns of capital and transfers by the government, enterprises and foreign countries. After paying for income tax, they gain disposable income, which can be consumed or saved. The national government gains income from various taxes, including indirect tax from production sectors, tariffs against imports and income taxes from enterprises and households, and expends this income through transfers and consumption or leaves it as savings. Foreign countries gain their income from capital investments in China and exports to China. Meanwhile, they have to pay for their imports from China. The net earnings after paying for transfers to China's households and government are the savings of foreign countries. The carbon border tax collected by foreign regions with BTAs will be added to their earnings.

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2.5. Dynamics and closure module The dynamics of the model are driven by the combination of total factor technological progress, labor and capital. The technological progress is indicated by the total factor productivity coefficient kel,i,t, as mentioned above in Eq. (3). In general equilibrium, commodity markets and factor markets are cleared. Specifically, in the labor market, it is assumed that in the long run, wages are endogenously determined, while the total supply of labor force is exogenous with a population constraint. The growth of the labor force is exogenously designed, as described in Eq. (9), and the sectoral labor force is determined endogenously. Lt Lt1 1 grlt 9

where Lt and Lt 1 are the total labor force in periods t and t 1, respectively. grlt is the growth rate of labor force in period t. In the capital market, the rate of return is assumed to be determined by monetary policy endogenously in the long run, while the capital accumulation is determined as shown in Eq. (10). The sectoral capital is determined endogenously K t 1K t1 I t 10

where Kt and Kt 1 are the total capital stock in periods t and t 1, respectively. It is the total investment in period t, and is the capital depreciation rate. The closure part of the model includes three aspects. First, foreign savings are assumed to be endogenous, while the exchange rate is assumed to be exogenous. Second, government surplus or deficit is assumed to be endogenous, while the various tax rates are assumed to be exogenous. Third, the Neoclassical closure is applied in the model, i.e., the total investment equals the total savings. Therefore, the investment is determined using Eq. (11). It St 11 where St is the total savings in period t.
Table 2 Stylized facts of 37 sectors in the year 2007. Ratio of export (%) AGR CEM CMF CNS COK* CUM EEQ ELEa EQP FOD FUR GAS* GLS M_C* M_G* M_O* MCM MET MFM MIN MNF NFR NMM OIL* OSR OTM PAP PRT RCM RUB STL TEX TOB TRM TRP WOD WTR
*

Share of export to the US and EU (%) 26.48 32.61 16.50 8.35 13.93 29.36 37.73 8.35 48.36 27.75 50.11 38.56 13.93 13.93 13.93 39.20 45.36 24.65 43.83 39.62 39.62 37.13 13.93 8.35 35.95 31.86 60.72 29.79 41.24 24.65 34.68 20.22 38.38 8.35 60.34

Energy intensity (tons of coal equivalent per ten thousand RMB yuan) 0.07 0.36 0.05 0.04 0.48 0.01 0.01 1.08 0.02 0.03 0.01 0.44 0.36 0.31 0.20 0.20 0.03 0.02 0.05 0.07 0.03 0.06 0.30 0.41 0.03 0.01 0.09 0.01 0.28 0.02 0.50 0.03 0.02 0.02 0.40 0.02 0.02

Direct carbon emissions (ton) 2964.55 6253.05 169.72 1725.94 1656.80 25.21 351.22 44857.77 988.58 1400.83 203.58 495.40 1428.16 3700.49 309.16 894.26 257.67 291.20 165.94 259.94 73.17 1192.25 1630.81 4811.60 3672.45 166.82 891.51 59.15 8997.67 378.40 22258.98 945.36 57.31 505.09 10569.69 215.56 20.48

Total carbon emissions (ton) 3642.64 7812.08 367.10 2949.88 1964.56 84.02 1386.42 16710.45 2328.74 2055.46 362.96 522.73 1664.05 4591.72 562.89 1628.22 528.72 1497.15 1025.95 631.26 439.72 3054.43 1960.11 5216.14 6908.11 363.47 1279.80 167.53 12225.11 1015.89 24634.40 1784.55 72.97 1044.56 11419.31 580.11 362.55

Carbon intensity (tons of carbon emissions per ten thousand RMB yuan) 0.07 0.58 0.09 0.05 0.69 0.02 0.02 0.55 0.06 0.06 0.02 0.48 0.50 0.52 0.26 0.26 0.08 0.09 0.30 0.18 0.19 0.16 0.43 0.31 0.05 0.04 0.16 0.03 0.38 0.06 0.64 0.07 0.03 0.03 0.30 0.06 0.33

1.36 2.70 6.13 0.67 8.23 69.20 42.67 0.21 15.24 5.22 32.90 0.00 14.94 2.62 2.08 2.08 9.96 20.98 0.02 4.18 3.44 7.58 13.62 3.10 6.41 13.07 3.98 31.24 10.74 17.43 9.56 34.06 0.81 10.47 10.75 23.19 0.00

Energy sectors (commodities).

Q. Bao et al. / China Economic Review 24 (2013) 7794 Table 3 Substitution elasticities and Armington elasticities of commodities. Commodities AGR M_C M_O M_G MFM MNF MIN FOD TOB TEX FUR WOD PAP PRT OIL COK RCM MCM CMF RUB CEM GLS NMM STL NFR MET EQP TRM EEQ CUM OTM ELE GAS WTR CNS TRP OSR f 1.50 1.30 1.30 1.30 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.25 1.25 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.25 1.25 1.50 1.50 1.50 1.60 e 0.70 0.65 0.65 0.65 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.60 0.60 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.60 0.60 0.70 0.70 0.70 0.90 ke 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 kel 0.5 0.2 0.2 0.2 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.2 0.2 0.3 0.5 0.5 0.5 im 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 0.9 0.9 0.9 3 2 2

83

ex 3.6 4 4 4 4 4 4 4 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 0.5 0.5 0.5 3.8 3 3

3. Data, calibration and scenarios 3.1. Data sources A social accounting matrix (SAM) provides a uniform database for the CGE model, reflecting the detailed economic activities of the whole economy. In this study, the SAM is built based mainly on China's national inputoutput (IO) data from 2007. In addition, other data are derived from such sources as the National Bureau of Statistics of P.R. China (2009a, 2009b), General Administration of Customs of P.R. China (2009) and Almanac of China's Finance and Banking Editorial Board (2009). Table 2 presents some stylized facts for 37 sectors in the baseline year 2007. The ratio of export is defined as the ratio of sectoral export to sectoral output. The share of export to the US and EU denotes the share of export to the US and EU of the total sectoral export. The energy intensity is defined as the ratio of the sectoral total energy use in terms of coal equivalents to the sectoral value added. The direct carbon emissions are sectoral carbon emissions from primary energy use, while the total carbon emissions are sectoral carbon emissions from both primary and second energy use. The latter includes the emissions from fossil-fuel use to generate electricity used in this sector. As shown in Table 2, except for the electricity industry, whose carbon emissions stem largely from burning fossil fuels to generate electricity for uses in other sectors, the total carbon emissions in other sectors are higher than their direct carbon emissions to varying degrees. Carbon intensity is defined as the sectoral total carbon emissions per unit of output. 3.2. Model calibration As commonly used in CGE analysis, a calibration procedure is adopted. The year 2007 is treated as the benchmark year. Scale parameters and sharing parameters are calibrated based on the SAM of the year 2007. The elasticities of substitutions and the Armington elasticities are specified, as shown in Table 3, according to the related studies (Shi et al., 2010; Wu & Xuan, 2002) with some modifications. 2 The depreciation rate is set at 0.05.
2

The elasticities will not change the results signicantly. Robustness tests on these parameters were carried out and are available upon request.

84 Table 4 Recursive dynamic calibration assumptions (%). Variables Growth Growth Growth Growth Growth rate of rate of rate of rate of rate of real gross domestic product primary industry tertiary industry total labor labor in primary industry

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2008 9.600 5.400 10.400 0.323 2.628

2009 9.200 4.200 9.600 0.349 3.452

2010 10.400 4.300 9.600 0.365 3.323

20112015 7.500 3.500 9.000 0.500 2.500

20162030 6.000 3.000 8.000 0.400 2.000

The model is recursively run up to the year 2030 in the method described in Section 2.5. The recursive, dynamic calibration assumptions are shown in Table 4. The growth rate of the GDP, primary industry (including the sector of Agriculture [AGR]), tertiary industry (including sectors of Transportation, storage, post telecommunication and other information-transmission services [TRP] and other services [OSR]), total labor force and labor in primary industry are specified for calibration from the years 2008 to 2030. In these assumptions, the actual economic data from the years 2008 to 2010 are used, while the dynamic path from 2011 to 2030 is forecasted based on historical data and the related literature. Two stages are defined for China's economy development from 2011 to 2030 according to Holz (2008): one is a relative faster-developing stage from 2011 to 2015, and the other is a more steadily growing stage from 2016 to 2030. 3.3. Scenarios In this paper, we focus on the BTA policies implemented by the US and EU that would be levied on the carbon content of their goods imported from China. To discuss the impacts of the BTAs on China's sectoral carbon emissions, three scenarios are developed under which carbon tariffs will be implemented at different levels, i.e., US dollars 20, 50 and 80 per ton of carbon emissions (US$/tC), according to recent studies (Elliott et al., 2010; Peterson & Schleich, 2007). In each case, the BTAs will be imposed starting in the year 2020. The BTAs have been designed separately by the US and EU with different destinations and different details (Asselt & Brewer, 2010; Zhang, 2010c, 2012b). In the US, as specified in the American Clean Energy and Security Act (HR2998) (US House of Representatives, 2009), the importers of primary emission-intensive products from countries that have not taken greenhouse gas compliance obligation commensurate with those that would apply in the US have to surrender carbon-emission allowances. The eligible industrial sectors are qualified as sectors whose energy or greenhouse-gas intensity is above 5% and whose trade intensity is at least 15% or sectors with an energy or greenhouse-gas intensity higher than 20%. In the EU, the coverage of targeted goods includes energy-intensive primary goods and finished goods. For simplicity, in this paper, we assume that the BTAs will be levied on all of the products from China. This assumption of the simulation gives an upper bound on the impacts of the BTAs on China. The large-country assumption is made, and carbon emissions are calculated based on both the primary and second energy use for each sector in our model. These assumptions and specifications will be altered in Section 5 for sensitivity analyses. 4. Results and analysis Based on our recursive dynamic CGE model for China, the impacts of the BTAs on China's sectoral carbon emissions are simulated and extensively analyzed in this section. First, a general review of the overall effects of the BTAs on China's total carbon emissions and energy demands is provided. The impacts of the BTAs on sectoral carbon emissions and energy demands are then analyzed. Finally, an economic analysis is provided to better explain the different impacts on sector emissions. 4.1. A general review The impact of the BTAs on China's total carbon emissions is shown in Fig. 2, which illustrates that the imposition of BTAs by the US and EU on their imports from China will decrease the total carbon emissions in China. Moreover, the effects of BTAs will be larger with a higher tax rate. For example, with a border carbon tax level of US$ 20, 50 and 80 per tC, the total carbon emissions during production in China will be cut by approximately 0.020%, 0.048% and 0.075% in 2020 and 0.011%, 0.027% and 0.042% in 2030, respectively. This result implies a positive effect played by the BTAs in mitigating China's total carbon emissions. However, the impacts are relatively small. The impact of BTAs on China's total carbon emissions can be directly attributed to the decrease in China's energy use. The impacts of BTAs on China's energy output (X) and demand (Q) are shown in Table 5. The output and demand of each energy source will be decreased by BTAs, especially for COK; e.g., the output and demand of COK will be reduced by approximately 0.118% and 0.104%, respectively, in 2020 due to the imposition of BTAs at a level of 50 US$/tC. The results in Table 5 also demonstrate that the output price (PX) and demand price (PQ) of all of the analyzed energy sources will be cut by BTAs. M_C and COK are the two energy sources with the greatest price drops; e.g., in 2020, the output price of M_C and COK will be decreased by approximately 0.171% and 0.141%, respectively, while the demand prices of M_C and COK will be cut by approximately 0.169% and 0.138%, respectively by BTAs levied at the level of 50 US$/tC. From the simulation results, we can easily find that the impacts of BTAs on China's total carbon-emissions mitigation are very small. This pattern is attributed to the decreasing prices of primary energy, which will stimulate the use of fossil energy, especially M_C and COK.

Q. Bao et al. / China Economic Review 24 (2013) 7794

85

20 0.000

50

80

carbon tax level (US$/tC)

change of total carbon emissions (%)

-0.010 -0.020 -0.030 -0.040 -0.050 -0.060 -0.070 -0.080

Fig. 2. Impacts of the studied BTAs on China's total carbon emissions (%).

2020 2025 2030

4.2. Sectoral carbon emissions The impacts of BTAs on both the sectoral direct carbon emissions (CO2) and total emissions (TOTCO2) will differ among sectors, as shown in Fig. 3. For some of the sectors, BTAs will reduce the sectoral carbon emissions. For example, for the industrial sectors of the manufacture of nonmetallic mineral products (NMM), manufacture of glass (GLS) and smelting and pressing of ferrous metals (STL), the total carbon emissions stemming from the consumption of both primary and second energies will be reduced by approximately 0.186%, 0.174% and 0.166%, respectively, due to BTAs with a level of 50 US$/tC in 2020. In contrast, the BTAs will increase carbon emissions from the industrial sectors of the manufacture of measuring instruments and machinery for cultural activity and office work (CUM), manufacture of electrical and electronic equipment (EEQ), mining and processing of nonferrous metal ores (MNF) and manufacture of textiles (TEX). Our results show that the carbon emissions from these sectors will be increased by approximately 0.226%, 0.172%, 0.106% and 0.097%, respectively, by BTAs levied at a level of 50 US$/tC in 2020. To find out why carbon emissions will decrease in some industrial sectors but increase in others with the levy of BTAs, sectoral energy demands are calculated. Fig. 4 represents the changes of sectoral total energy demands as well as demands for M_C and OIL due to BTAs. M_C and OIL are chosen as the representative energy types whose output prices are reduced the most and least by BTAs, and their results are shown in Table 5. From Table 5, we can see that BTAs also affect the sectoral total energy demand in two directions. In some of the sectors, the total energy demand will be reduced. For example, in the industrial sectors of the manufacture of nonmetallic mineral products (NMM), manufacture of glass (GLS) and smelting and pressing of nonferrous metals (STL), the total energy demand will decrease by approximately 0.198%, 0.185% and 0.170%, respectively, due to BTAs at a level of 50 US$/tC in 2020. In contrast, the total energy demand will be increased in the industries of the manufacture of measuring instruments and machinery for cultural activity and office work (CUM) and the manufacture of electrical and electronic equipment (EEQ). The total energy demand in these sectors will be increased by approximately 0.199% and 0.142% by the BTAs levied at 50 US$/tC in 2020, respectively. Another interesting result, shown in Fig. 4, is that the energy-substitution effect differs among the energy types. Taking M_C and OIL for example, it can be seen that the demands for M_C in most of the studied sectors will increase as a result of the BTAs. What's more, the increasing rate of M_C use is obviously higher than the sectoral total energy demand, while the decreasing rate of M_C use is lower than the sectoral total energy demand. For example, for the sectors CNS, EQP and MIN, the total energy demand will be decreased by BTAs; however, the use of M_C will be increased. The sectoral demand of OIL shows a pattern opposite to that of M_C. The main reason for this result can be found in Table 5: the prices of M_C will show the greatest decrease due to BTAs. Because M_C will emit more carbon than OIL, the energy-substitution effects triggered by the impacts of BTAs on energy prices will offset the effects of BTAs on carbon-emission mitigation.
Table 5 Impacts of the studied BTAs on the energy sources in 2020 at a tax level of US$ 50 per tC (%). X COK ELE GAS OIL M_C M_G M_O 0.118 0.021 0.016 0.058 0.007 0.004 0.004 PX 0.141 0.129 0.119 0.078 0.171 0.096 0.095 Q 0.104 0.021 0.016 0,064 0.013 0.066 0.067 PQ 0.138 0.129 0.119 0.075 0.169 0.075 0.074

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0.250 0.200

change of sectoral carbon emissions (%)

0.150 0.100 0.050 0.000 -0.050 -0.100 -0.150 -0.200 -0.250

AGR CEM CMF CNS COK* CUM EEQ ELE* EQP FOD FUR GAS* GLS M_C* M_G* M_O* MCM MET MFM MIN MNF NFR NMM OIL* OSR OTM PAP PRT RCM RUB STL TEX TOB TRM TRP WOD WTR
Fig. 3. Impacts of the BTAs on China's sectoral carbon emissions in 2020 at a tax level of US$ 50 per tC (%).

TOTCO2 CO2

4.3. Economic analysis of the results Why will the BTA policies imposed by the US and EU have different impacts on China's sectoral emissions and energy demand? What are the main factors that drive these results? In this subsection, the transmission mechanism of BTAs is further discussed from both the supply and demand perspectives. The BTAs will first take effect in the international trade module, where the export prices in different sectors faced by Chinese enterprisers will be decreased by BTAs even under the large-country assumption for China. As shown in Table 6, all of the export prices (PE) will be cut by BTAs. With BTAs levied at a level of 50 US$/tC in 2020, the decrease of PE varies from 0.417% (sector GLS) to 0.038% (sector CUM).

0.400 0.300 0.200 0.100 0.000 -0.100 -0.200 -0.300 -0.400 AGR CEM CMF CNS COK* CUM EEQ ELE* EQP FOD FUR GAS* GLS M_C* M_G* M_O* MCM MET MFM MIN MNF NFR NMM OIL* OSR OTM PAP PRT RCM RUB STL TEX TOB TRM TRP WOD WTR
Fig. 4. Impacts of the BTAs on China's sectoral energy demands in 2020 at a tax level of US$ 50 per tC (%).

change of sectoral energy using (%)

TOTAL M_C OIL

Q. Bao et al. / China Economic Review 24 (2013) 7794 Table 6 Impacts of the BTAs on the sectoral supply in 2020 at a tax level of US$ 50 per tC (%).* Energy sectors. X AGR CEM CMF CNS COK CUM EEQ ELE EQP FOD FUR GAS GLS M_C M_G M_O MCM MET MFM MIN MNF NFR NMM OIL OSR OTM PAP PRT RCM RUB STL TEX TOB TRM TRP WOD WTR 0.001 0.052 0.011 0.009 0.118 0.086 0.063 0.021 0.027 0.011 0.005 0.016 0.157 0.007 0.004 0.004 0.015 0.019 0.107 0.071 0.021 0.009 0.157 0.058 0.016 0.016 0.007 0.001 0.060 0.002 0.151 0.014 0.029 0.017 0.024 0.020 0.008 D 0.001 0.020 0.008 0.009 0.103 0.054 0.044 0.021 0.018 0.013 0.019 0.016 0.000 0.008 0.004 0.004 0.015 0.008 0.107 0.061 0.027 0.022 0.042 0.057 0.020 0.031 0.003 0.013 0.011 0.004 0.055 0.006 0.029 0.020 0.023 0.016 0.008 E 0.113 1.100 0.071 0.136 0.492 0.116 0.104 0.021 0.096 0.075 0.061 1.519 0.026 0.052 0.049 0.017 0.067 0.248 0.375 0.362 0.203 1.144 0.173 0.099 0.050 0.157 0.043 0.511 0.009 1.205 0.043 0.081 0.020 0.030 0.046 PX 0.101 0.097 0.074 0.090 0.141 0.044 0.052 0.129 0.070 0.088 0.075 0.119 0.119 0.171 0.096 0.095 0.079 0.076 0.105 0.096 0.065 0.068 0.125 0.078 0.082 0.062 0.088 0.070 0.087 0.071 0.097 0.081 0.075 0.067 0.073 0.082 0.383 PD 0.101 0.090 0.075 0.090 0.138 0.052 0.056 0.129 0.068 0.088 0.078 0.119 0.085 0.171 0.096 0.095 0.079 0.074 0.105 0.094 0.064 0.065 0.100 0.077 0.083 0.065 0.087 0.073 0.076 0.071 0.077 0.083 0.075 0.067 0.073 0.081 0.383 PE

87

0.069 0.326 0.062 0.052 0.223 0.038 0.043 0.128 0.085 0.067 0.060 0.417 0.163 0.082 0.082 0.080 0.087 0.140 0.172 0.161 0.114 0.341 0.103 0.044 0.048 0.121 0.061 0.185 0.074 0.328 0.075 0.051 0.059 0.076 0.088

The changes of the stylized facts of 37 sectors as listed in Table 2 due to the applied BTAs are shown in Figs. 5 to 7 with sectoral export-price changes for comparison. The sectors with the greatest decreases in export prices can be characterized as export-oriented, energy-intensive and carbon-intensive. For these sectors, the sectoral carbon intensity plays a dominant role,

ratio of export (%)

0.000 0 -0.050 change of sectoral PE (%) -0.100 -0.150 -0.200 -0.250 -0.300 -0.350 -0.400 -0.450
Fig. 5. Impacts of the BTAs on the sectoral export prices in 2020 with a tax level of US$ 50 per tC against a sectoral ratio of export to output.

10

20

30

FUR 40 TEX

50

60

70

80

PRT MET WOD RCM COK* STL CEM NMM

EEQ

CUM

GLS

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energy intensity (tons of coal equavalent per ten thousand RMB yuan)
0.000 -0.050 0 0.2 0.4 0.6 0.8 1 1.2

change of sectoral PE (%)

M_G*
-0.100 -0.150 -0.200 MNF -0.250 -0.300 -0.350 -0.400 -0.450

TRP OIL* ELE*

MIN

M_C* RCM COK*

NMM

CEM GLS

STL

Fig. 6. Impacts of the BTAs on the sectoral export prices in 2020 with a tax level of US$ 50 per tC against the sectoral energy intensity.

while the export ratio only plays a minor one. For example, for sectors GLS, NMM, STL and CEM, whose export prices will be reduced by more than 0.3% in 2020 due to BTAs with a tax level of 50 US$/tC, the ratios of sectoral export are all below 20%, as shown in Fig. 5, which is much lower than those for sectors CUM, EEQ, TEX, FUR, PRT, etc. However, as shown in Fig. 6, the energy-intensity of sectors GLS, NMM, STL and CEM are among the highest. Moreover, the carbon-intensity of these sectors shown in Fig. 7 are also among the highest. For sectors that are export-oriented but not energy- and carbon-intensive, e.g., CUM, EEQ, TEX, FUR and PRT, the decreases of export prices will be extremely small. Meanwhile, for sectors that are energy- and carbon-intensive but not export-intensive, e.g., TRP, M_G, M_O and OIL, the reduction of export prices will be modest. The reductions in export prices will then affect the whole economy from both the demand and supply sides. On the supply side, as export prices decrease differently in different sectors, the sectoral export profits will be reduced, and producers will accordingly substitute away from these goods towards domestic products, which can be termed the substitution effect. This effect will somewhat stimulate domestic supply. On the demand side, as prices decrease due to the BTAs, the domestic income will be reduced, and the demand will be decreased, which can be termed the income effect. This effect will somewhat reduce domestic demand. The final effects on sectoral output and demand, i.e., whether positive or negative, will depend on the relative strength of these two effects. Table 6 reflects the impacts of the BTAs on the sectors from the supply side. It can be seen that output prices (PX) and domestic prices (PD) for all of the sectors will decrease following the decrease of export prices. However, the impacts of the BTAs on industrial outputs (X), exports (E) and domestic products (D) will vary across sectors. The sectors whose outputs suffer the largest decreases from the BTAs are those whose export prices are reduced the most. For example, for sectors NMM, STL and GLS, the sectoral total output will be reduced by 0.157%, 0.157% and 0.151%, respectively, due to BTAs at a level of 50 US$/tC. The

sectoral carbon intensity (tons of carbon emissions per ten thousand RMB yuan)
0.000 -0.050 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8

changes of sectoral PE (%)

TRP M_G* MNF MIN OIL* ELE* MFM RCM M_C* COK*

-0.100 -0.150 -0.200 -0.250 -0.300

STL
-0.350 -0.400 -0.450

NMM GLS

CEM

Fig. 7. Impacts of the BTAs on the sectoral export prices in 2020 with a tax level of US$ 50 per tC against the sectoral carbon intensity.

Q. Bao et al. / China Economic Review 24 (2013) 7794 Table 7 Impacts of the BTAs on the sectoral demands in 2020 at a tax level of US$ 50 per tC (%). * Energy sectors. Q AGR CEM CMF CNS COK CUM EEQ ELE EQP FOD FUR GAS GLS M_C M_G M_O MCM MET MFM MIN MNF NFR NMM OIL OSR OTM PAP PRT RCM RUB STL TEX TOB TRM TRP WOD WTR 0.010 0.020 0.004 0.010 0.104 0.016 0.019 0.021 0.028 0.018 0.023 0.016 0.008 0.013 0.066 0.067 0.019 0.010 0.139 0.066 0.001 0.014 0.044 0.064 0.022 0.038 0.009 0.016 0.024 0.000 0.057 0.002 0.029 0.026 0.025 0.018 0.008 D 0.001 0.020 0.008 0.009 0.103 0.054 0.044 0.021 0.018 0.013 0.019 0.016 0.000 0.008 0.004 0.004 0.015 0.008 0.107 0.061 0.027 0.022 0.042 0.057 0.020 0.031 0.003 0.013 0.011 0.004 0.055 0.006 0.029 0.020 0.023 0.016 0.008 M 0.152 0.145 0.108 0.140 0.259 0.050 0.062 0.068 0.111 0.139 0.126 0.127 0.260 0.146 0.145 0.127 0.115 0.210 0.171 0.083 0.087 0.171 0.145 0.093 0.113 0.132 0.116 0.120 0.104 0.142 0.121 0.127 0.111 0.085 0.129 PQ 0.098 0.090 0.074 0.090 0.138 0.028 0.047 0.129 0.064 0.087 0.076 0.119 0.082 0.169 0.075 0.074 0.078 0.073 0.094 0.092 0.055 0.063 0.099 0.075 0.082 0.063 0.085 0.072 0.072 0.070 0.076 0.081 0.075 0.065 0.073 0.080 0.383 PD 0.101 0.090 0.075 0.090 0.138 0.052 0.056 0.129 0.068 0.088 0.078 0.119 0.085 0.171 0.096 0.095 0.079 0.074 0.105 0.094 0.064 0.065 0.100 0.077 0.083 0.065 0.087 0.073 0.076 0.071 0.077 0.083 0.075 0.067 0.073 0.081 0.383 PM

89

0.051 0.048 0.036 0.047 0.086 0.017 0.021 0.076 0.037 0.046 0.042 0.042 0.087 0.049 0.048 0.042 0.038 0.070 0.057 0.028 0.029 0.057 0.048 0.047 0.038 0.044 0.039 0.040 0.035 0.047 0.040 0.042 0.037 0.042 0.043

sectors whose outputs will be increased are those whose export prices are reduced the least. For example, for sectors CUM and EEQ, the sectoral total output will be increased by 0.086% and 0.063%, respectively, due to BTAs at a level of 50 US$/tC. Table 7 reflects the impacts of the BTAs on the sectors from the demand side. It is worth noticing that sectoral import prices (PM) will be affected by the BTAs under the large-country assumption of China. The impacts of the BTAs on sectoral import prices are all negative but are smaller than those of export prices. Therefore, sectoral demand prices (PQ) will be negatively affected by BTAs. It can also be seen that imports (M) in all of the sectors will be decreased due to the income effect, while the total demands (Q) will be affected differently across sectors. The sectors whose demands are reduced most are the sectors MFM and COK, with the reduction of 0.139% and 0.104%, respectively, in 2020 at a BTA level of 50 US$/tC.

5. Robustness analyses and extensions 5.1. Altering the key assumptions and specications In our model proposed above, there are the two key assumptions and specifications that are likely to affect the simulation results. One is the large-country assumption, and the other is the method used to calculate sectoral carbon emissions. These two assumptions and specifications are altered in this subsection to determine whether our results will still hold. To that end, four scenarios are designed, as shown in Table 8.
Table 8 Four scenarios for the alternative assumptions. Large country Total carbon emissions Carbon emissions based on primary energy BAU Scenario A2 Small country Scenario A1 Scenario A3

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BAU 0.000

Scenario A1

Scenario A2

Scenario A3

change of total carbon emissions (%)

-0.010 -0.020 -0.030 -0.040 -0.050 -0.060 -0.070 -0.080 -0.090 -0.100 2020 2025 2030

Fig. 8. Impacts of the BTAs on the total carbon emissions under the alternative assumptions in 2020 at a tax level of US$ 50 per tC (%).

The impacts of BTAs on the total carbon emissions under four scenarios are shown in Fig. 8. One important finding is that the assumptions of the modeled unit being a large country or small country lead to different results. Under the small-country assumption, because China's exports have no ability to affect the world export prices, all of the prices decreased by BTAs will be reflected in the export prices faced by China's export enterprises. However, under the large-country assumption, because the changes of China's export will affect the export prices, the loss caused by BTAs will be greatly relieved. This buffering can also be reflected in changes in the average export prices, as shown in Fig. 9. In the real world, because some sectors have a greater ability to affect the export prices, while others have less, the true impacts of BTAs on China will lie in between the results estimated under these two assumptions. The second implication relates to the method of calculating carbon emissions. By calculating total carbon emissions rather than just calculating emissions from direct fossil-fuel use, as shown in Table 2, most of the sectors will emit more carbon and thus will be more affected by BTAs. Table 9 reports the three sectors whose carbon emissions will be either decreased or increased the most under the four scenarios. While there are marked differences in their emissions based on different emissioncalculation methods, the assumptions of a large or small country have much greater effects on their emission levels, either direct or total, than the method of emission calculation. For most of the sectors, the effects of BTAs on carbon emissions at the sectoral level are limited (Fig. 2). At the aggregated level, such sectoral effects are cumulative. By comparing the results of Scenario A2 and BAU or Scenario A3 and Scenario A1 as shown in Figs. 8 and 9, respectively, we can see that the effects of BTAs on total carbon emissions are markedly larger based on the method of total carbon-emission calculation than based on the method of direct carbon-emission calculation.

BAU 0.000

Scenario A1

Scenario A2

Scenario A3

change of average export prices (%)

-0.020 -0.040 -0.060 2020 -0.080 -0.100 -0.120 -0.140 -0.160 -0.180 2025 2030

Fig. 9. Impacts of the BTAs on the average export prices under the alternative assumptions at a tax level of US$ 50 per tC (%).

Q. Bao et al. / China Economic Review 24 (2013) 7794 Table 9 Impacts of the studied BTAs under the alternative assumptions on the sectoral carbon emissions (%). BAU Top three decreased sectors NMM GLS STL CUM EEQ MNF 0.186 0.174 0.166 0.226 0.172 0.106 Scenario A1 0.358 0.335 0.329 0.445 0.346 0.197 Scenario A2 0.169 0.163 0.153 0.182 0.151 0.110

91

Scenario A3 0.325 0.315 0.307 0.363 0.309 0.201

Top three increased sectors

5.2. Factoring in technological progress An interesting issue is that the results will change when technological progress is factored into the model. An efficiency parameter is set in the production function, as shown in Eq. (12).    1= ke ke KEi;t acap;i CAP i;t ke aenergy;i energy;i;t ENERGY i;t : 12

As shown in Eq. (12), KEi,t denotes the composite of capital (CAP) and energy composite (ENERGY), and energy,i,t denotes the technological change in the production process, which will minimize the required energy input. To analyze the technological change in energy-saving technology, it is assumed that the annual increasing rate of energy,i,t is captured by an autonomous energy efficiency-improvement (AEEI) parameter. In the proposed model above, the AEEI parameter is set as zero. To examine the effects of technical progress, we simulated three scenarios of different AEEI values, as shown in Table 10. As we can see in Fig. 10, the impact of technological progress in China's production depends on the timing and the technical progress rates. The marked impacts of BTAs on total emissions occur in 2020 for a technological progress rate of 2% per year. However, for a technological progress rate of 0.5% per year, marked effects will not occur until 2025. One interesting question still remains regarding whether and how technological progress itself works to mitigate carbon emissions. From Fig. 11, we can find an obvious indication that technological change will greatly help reduce the carbon emissions in China. Even under the scenario with the lowest rate of technical progress, where AEEI is set at 0.005, that is, 0.5% per year, the reduction of carbon emissions will be greater than the impacts of BTAs. 6. Conclusion and policy suggestions The proposed border carbon adjustments target major emerging economies, such as China and India. In this paper, we analyzed the sectoral carbon-emission impacts of the BTAs implemented by the US and EU on China. We built a recursive dynamic multi-sector CGE model for the Chinese economy up to the year 2030 and simulated three scenarios with tax levels of US$ 20, 50 and 80 per ton of carbon, respectively. Our simulation results show that BTAs will decrease China's total carbon emissions and total energy consumption. A higher tax level relates to a more significant impact. The main reason lies in the decrease of export prices and its further impacts on the whole economy. However, the impacts of BTAs on sectoral carbon emissions and energy demands will vary across sectors. Sectors that are export-oriented and energy- and carbon-intensive are likely to be affected more by BTAs, and these sectoral carbon emissions will be reduced most. However, in other sectors, carbon emissions are likely to be increased by BTAs. The main reason lies in the outputdemand effect, which will cut down sectoral output and demand and further decrease sectoral energy demand and carbon emissions. Moreover, the substitution effect among different energy sources will also reduce the effects of carbon-emission mitigation. That is, as prices of M_C and COK with relatively high emission intensity will be decreased the most by BTAs, the demands for M_C and COK will increase, which will stimulate sectoral carbon emissions. An interesting finding derived from the simulation results is that BTAs will affect China's economy in a different way compared with carbon-tax policies. The BTAs will in general decrease overall prices in China, while carbon-tax policies will increase the prices by adding carbon costs. Furthermore, BTAs may even stimulate some sectoral carbon emissions and energy demands as a result of the overall decrease of energy prices. In contrast, carbon-tax policies will increase the domestic prices, especially for the carbon-intensive sectors, thereby decreasing sectoral fossil-energy demands as well as carbon emissions. In conclusion, the price
Table 10 Four scenarios of technological progress. AEEI value BAU Scenario C1 Scenario C2 Scenario C3 0.000 0.005 0.010 0.020

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BAU 0.000

Scenario C1

Scenario C2

Scenario C3

change of total carbon emissions (%)

-0.010 -0.020 -0.030 -0.040 -0.050 -0.060

2020 2025 2030

Fig. 10. Impacts of the BTAs on the total carbon emissions under alternative technology scenarios in 2020 at a tax level of US$ 50 per tC (%).

Scenario C1 0.000

Scenario C2

Scenario C3

differences of baseline carbon emissions from BAU (%)

-2.000 -4.000 -6.000 -8.000 -10.000 -12.000 -14.000 -16.000 2020 2025 2030

Fig. 11. Differences of baseline carbon emissions under alternative technology scenarios from the BAU scenario (%).

mechanisms that lead to different effects of BTAs and carbon tax policies play a significant role and should be given sufficient attention in policy decisions regarding carbon-emission abatement. Moreover, the impacts of BTAs are relatively small in China and are insufficient for achieving the main aim of BTAs, i.e., avoiding carbon leakage. As indicated by our results, the overall carbon emissions in China will only be modestly decreased. However, cooperative agreements, such as technology sharing as well as energy-saving and next-generation low-carbon technologies, will be more productive for protecting the global environment, as discussed by Weber and Peters (2009) and Bassi and Yudken (2011). Higher relative prices of different energy types will lead to decreases in coal and oil consumption and cut down aggregate energy intensity. There remain several limitations of this research, and further progress could be made in several aspects. First, this study concentrates on the impacts of the BTAs on China's sectoral carbon emissions. However, it will be still interesting and important to study the responding policies by China's government, e.g., carbon tax or clean energy development strategies, and the combined effects of these policies. Secondly, this study accounts for a single-country general equilibrium model for China only, but it would be more desirable to provide a multi-country and multi-sector model to study the global impacts of BTAs on carbon emissions. The technological developments and China's commitment to reduce carbon intensity should also be considered in a fine-scale analysis. Acknowledgments This study was supported by the National Natural Science Foundation of China under grant no. 71203214 and no. 91224004 and the Chinese Academy of Sciences. An earlier version of the study was presented at the 19th Annual European Association of Environmental and Resource Economists Conference, Prague, the Czech Republic, June 2730, 2012. The study has benefited from

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helpful comments from two anonymous referees and constructive discussions with Chen Xikang. That said, the views expressed here are those of the authors. The authors bear sole responsibility for any errors and omissions that may remain. References
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