Incorporating Domestic Margins into the GTAP-E Model: Implications for Energy Taxation

Abstract

In most applied general equilibrium (AGE) analyses, the transportation, wholesaling, and retailing activities required to facilitate the flow of goods from domestic producers (or imports) to domestic buyers are not tied to specific commodities. Because the margins on energy commodities can be substantial, ignoring these domestic margins has important consequences when analyzing the impacts of policies designed to limit greenhouse gas emissions. The objective of this paper is to incorporate the structure of the domestic trade and transport margins in the GTAP-M model into the GTAP-E model. The results for two different sets of experiments are compared for the GTAP-E model with and without domestic trade and transport margins. In experiments that varied a real tax on carbon emissions from $25 per ton to $100 to ton, the standard GTAP-E model over-estimated the reduction in carbon emissions, compared to the GTAP-ME model that includes domestic margins, by 34 to 80 million metric tons (10 to 15 percent). Similarly, experiments that compared the level of carbon taxes required to attain the country-specific abatement targets specified in the Kyoto Protocol, found that the standard GTAP-E model without domestic margins substantially under-estimated the required carbon tax compared to a model with domestic margins.