Analysis of Post-Kyoto Scenarios : The AIM Model

M. Kainumaa Y. Matsuokab, and T. MoritaaaGlobal Environment Division, National Institute for Environmental Studies,
16-2 Onogawa, Tsukuba, 305-0053 Japanb

Faculty of Engineering, Kyoto University,
Yoshida-Honmachi, Sakyo-ku, Kyoto, 606-8501 Japan

Abstract
The AIM/top-down model is a recursive general equilibrium model used to analyze the post-Kyoto
scenarios presented by EMF16. Differences among scenarios mainly arise from the setting ofemission trading. Japan’s marginal cost is the highest among the Annex I countries except New
Zealand, where a relatively high emission reduction is necessary, while the highest GDP loss isobserved in the USA in 2010 in the no trading case. The marginal costs will become much less in the
global trading case. The countries of the Former Soviet Union sell emission rights and the USA buys
the largest amount of them. Emission reductions by trading will account for a large part of the total
emission reductions if there is no restriction on trading. The GDP gain of the Former Soviet Union is
the largest in 2010 in the trading cases. The GDP change in Middle East Asia is negative, and reaches
the highest level in the no trading case. Carbon leakage is particularly observed in the no trading case.

11. Introduction
The AIM model (Asian-Pacific Integrated Model) estimates the emission and absorption ofgreenhouse gases in the Asia-Pacific region and judges their impact on the natural environment andsocio-economy. It aims to contribute to policy-making with respect to global warming and its
evaluation.
The AIM model consists of a greenhouse gas emissions model (AIM/emission) that forecasts theamount of anthropogenic greenhouse gas emissions, a warming phenomenon model (AIM/climate)that forecasts the concentration of greenhouse gases in the atmosphere and estimates the temperature
increase, and a warming impact model (AIM/impact) that estimates the influence that climate change
has on the natural environment and socio-economy of the Asia-Pacific region (Matsuoka et al., 1995).
The AIM/emission model is made up of models of social and economic activities that become theorigin of greenhouse gas emissions through energy consumption, changing land use, and agriculturaland industrial production. At its heart lies the energy model, comprising a world model as well as
country-specific models for the Asia-Pacific region. The world model is a top-down model that uses
economic indices based on prices and elasticity to express the connection between energy
consumption and production. The country-specific model is a bottom-up end-use model that focuseson the activities of the people who deal with industrial production and the consumption of energy as
well as changes in the technologies used in these countries, and forecasts from these detailed
descriptions the total energy consumption and production. These two models are linked to each other.
Future energy efficiencies are calculated based on the end-use model and international trade effects
are estimated based on the top-down model.
The AIM/top-down model was used to analyze the economic impacts of post-Kyoto scenarios
presented by EMF16. It was found that Japan’s marginal cost of CO2 reduction is the highest among
the USA, the EU, and Japan in 2010 in the no trading case. The highest GDP loss is observed in theUSA. The marginal cost becomes much less in the global trading case. The countries of the Former
Soviet Union sell emission rights and the USA buys the largest amount of them. Emission reductions
by trading will account for a large part of the total emission reductions if there is no restriction on
trading. The GDP gain of the Former Soviet Union is the largest in 2010 in the trading cases. The
GDP change in China is negative while that in India is positive, although the values are small. The
GDP change in Middle East Asia is negative, and reaches the highest level in the no trading case.
Carbon leakage is particularly observed in the no trading case.

2. The AIM Model Structure
The AIM model is a recursive dynamic equilibrium model of the world economy used to analyze theeffects of post-Kyoto scenarios. The model divides the world into 21 geopolitical regions. To analyze
the impacts of post-Kyoto scenarios, Annex I is divided into the following regions: Japan, Australia,
New Zealand (NZL), the United States of America (USA), Canada, the European Union (EU), andEastern Europe and the Former Soviet Union (EEFSU). The AIM model focuses on the Asia-Pacificregion, which is divided into 10 regions: Taiwan, the Republic of Korea, Hong Kong, Singapore,
China, India, Indonesia, Malaysia, the Philippines, and Thailand. Other regions are Latin America (LAmerica), Middle East Asia and North Africa (ME-Asia), Sub-Saharan Africa (SS-Africa), and Restof World (ROW).
Goods are aggregated into seven energy goods and four non-energy goods. Energy goods are coal,crude oil, petroleum and coal products, natural gas, nuclear energy, renewable energy, and electricity.
Non-energy goods are aggregated into four categories. The first is energy-intensive products; thesecond is agriculture, other manufactures and services; the third is transport industries; and the last is2

savings.

input

CO2
Fuels
input

input

input

Non-energy
goods

consumption

primaryfactors

Government

rightsCO2

investment

Production Sectors

carbon emission

consumption

rent

CO2

input

Electricity

CO2Household

Figure 1 AIM/top-down model structure

Figure 1 shows the structure of the AIM/top-down model. The model has three sectors—the
production, household, and government sectors—in each region. CO2 and other greenhouse gases are
emitted by each of these sectors. The production of electricity and of non-energy goods uses fossil
fuels in the production sector, and the use of automobiles and other direct uses of fossil fuels emit
CO2 in the household and government sectors. It is assumed that the household sector has carbon
emission rights and distributes them to the other sectors and within the household sector itself. Fossil
fuels cannot be used without carbon rights. The price of carbon rights depends on several factors suchas emission targets and the method of emission trading. The household sector also supplies primaryfactors to the production and government sectors. An agent in the household sector determines
consumption and saving. The marginal propensity to save is a calibrated function of a weighted
aggregate of regional and global rates of return on fixed capitals. A regional investment is calculatedwith the GDP growth rate, regional and global rates of return. Investment is balanced with saving ona global scale. The model allows for trade in intermediate goods. AIM assumes identical preferencesin all countries for foreign versus domestic goods; i.e., the elasticity of substitution is the same for all
regions. Domestic and export goods are not perfect substitutes.
Figure 2 shows the nesting of the production structure in AIM. All industries have a similar
production structure. Output is calculated by primary factors, intermediate goods, and energy. Energy
is nested into fossil fuels and electricity, and fossil fuels are in turn nested into fuel goods and carbon
emission rights. We assume elasticity between fuel goods and carbon rights equals zero. Therefore,carbon rights become a constraint on production functions.

3Output

EnergyIntermediate
Goods

Electricity

Fossil Fuels
Fuel
Goods

Primary Factors

CarbonRightsLabor

CapitalElasticity of Substitution:
Energy/Primary/Intermediates=0.3 (EIS), 0.2 -0.5 (Others)
Electricity/Fossil Fuels =0.3, Fuel/Fuel=1
Labor/Capital=1, Fuels/Carbon=0

Figure 2 Nesting of production structure in AIM

3. Post-Kyoto Simulation
AIM was run under five scenarios: no trading, Annex I trading, full global trading, double bubble,
Annex I + China and India, and no trading with 5% offset. These were analyzed for implementationof the Kyoto agreements. Each region must achieve the following reductions by 2010: Australia,+8%; New Zealand 0%; Japan +6%; USA, -7%; EEFSU, 0%; and EU, -8%. It is assumed that carbon
emissions can be traded without quantitative limitations on trading cases within the allowable
emissions. For non-Annex I countries, the emissions are bounded by their BaU emissions when they
are involved in trading.

3.1 Reference case
Figure 3 shows CO2 emissions in the reference case. It was 5.8 GtC in 1992 and will rise to about 20
GtC in 2010. The increases in Latin America and Middle East Asia are large. Those in Korea,
Singapore, and Malaysia are also large (these countries are included in ROW in Figure 3). Some of
the figures are ten times greater than the 1990 levels. The emissions of the USA, Canada, EU, Japan,and Australia are between 2.2 and 2.4 times greater than the 1990 levels.
Data were calibrated based on 1992 data. Energy data were calibrated by IEA data (IEA, 1995), andother goods were calibrated by GTAP database (Hertel, 1995; McDougall, 1997). GDP growth datafrom world economic outlook (IMF, 1998) were used to calibrate productivity growth rate from 1990
to 2000, and the median values of GDP growth rates of the International Energy Outlook were used
for the years 2000 to 2020. The ratio of GDP growth in 2100 was estimated based on the IPCC
Morita database, using the median values in that database. CO2 emissions in 2010 were calibratedusing the numbers in the national reports.

4

3.2 Changes of CO2 emissions under the Kyoto agreement
How much will the marginal cost be in order to permanently achieve the Kyoto targets in each case?
Figure 4 shows the CO2 emissions and marginal costs in the no trading case in 2010. The bar graphshows CO2 emissions. The left-hand bar for each region shows the 1990 emission level, the bar thatis second from the left shows the target emission level, the bar that is third from the left shows the
BaU emission level, and the right-hand bar shows the emission level in the no trading case. The BaU
emission of EEFSU is less than the target, reflecting the economic deterioration of that region. The
emission of EEFSU in the no trading case is higher than the BaU emission by about 1%; that is, CO2
leakage is observed.
The line graph shows the marginal costs to achieve the emission targets. The emission of EEFSU isbelow the 1990 level until 2030 in the BaU case, so no policy intervention is necessary in 2010. On
the other hand, CO2 emission in NZL in the reference case is 11 MtC in 2010, and its emissions must
be reduced to 7 MtC. As NZL has to reduce about 50% of its emissions, the marginal cost becomes
exceptionally high. Apart from NZL, the marginal cost of Japan is the highest at 234 US$ (1992) /tC.
The ranking of other regions is EU, Canada, USA, and Australia, in that order. Although the target forAustralia is +8%, the emission in the BaU case is larger than the target and an intervention policy isrequired to reduce emissions. However, the cost is the lowest except for EEFSU.

ROW
SS-Africa

25

L-America

20

India
China

15

EEFSU
10

EU
Canada

5

USA
Japan

0
21
00

90
20

80
20

20
70

20
60

50
20

40
20

30
20

20
20

20
10

Australia
20
00

19
90

CO2 emissions (GtC/year)

ME-Asia

Figure 3 World CO2 emissions (reference case)

5

1800
1600
1400
1200
1000
800
600
400
200
0

300
250

1990

200

Target

150

BaU

100

No Trading

50

EE
FS
U

N
ZL

Ja
pa
n
Ca
na
d
Au a
st
ra
lia

EU

0

U
SA

CO2 emissions (MtC/year)

Marginal Cost
US$(1992)/tC

Figure 4 CO2 emissions and marginal costs in 2010 (no trading case)

Figure 5 plots changes in emission right prices in Annex I countries in the no trading case from 1990
to 2050. Except for EEFSU, emission right prices rise sharply in 2010 compared to 2000, while thatof EEFSU rises slowly from 2030. When a heavy reduction policy is adopted, Annex I countries muststruggle to achieve it. They will try to invest in energy-related industries for the development of newenergy sources and/or to decrease energy demand. The first step is usually difficult when the burden
is severe.
How much will the emission right prices be in the trading cases? Figure 6 compares emission rightprices in the trading scenario. The emission right in the global trading case is priced lower than thosein other cases. It is about 38 US$ in 2010, compared to the emission right price in the Annex I case of
65 US$ in 2010. It is much less than that in the no trading case. The emission right price in the EU in
the double bubble case is almost the same as that in the no trading case, and the emission right pricecurve also follows the same pattern.
Figure 7 shows the amounts of emission right trading in the Annex I trading case. EEFSU will export
emissions and the USA, EU, Japan, and Canada will import them. The amounts imported by the USA
decrease as time goes on, and the amounts exported by EEFSU also decrease.
Figure 8 shows the amounts of emission right trading in the global trading case. EEFSU, Latin
America, and ROW export emission rights, while the USA, EU, and Japan continue to import them.
The amount imported by the USA will increase in the global trading case, although it decreases in the
Annex I trading case. One reason is that as the economic impact in the Annex I trading case is muchlarger than that in the global trading case and emission rights can only be imported from EEFSU,
investments are shifted to energy industries and more renewable energy will become available in the
future. On the contrary, as Annex I countries can import emissions much more cheaply in the global
trading case than in the Annex I trading case, they rely on emission trading and reductions in theirown countries are not promoted.
Figure 9 compares CO2 emission changes in Annex I countries in 2010. In the no trading case, theUSA has to reduce emissions by about 25% and Japan has to reduce them by about 22%. Carbon
leakage is observed in EEFSU. The emission level of EEFSU is 1% larger compared to the BaU
emission. In the Annex I and global trading cases, EEFSU will reduce emissions by 32% and 23%,
respectively, and will sell emission rights. In the global trading case, the USA will reduce emissions
by 7% compared to the BaU case, which is significantly less compared to the no trading case.

6

Marginal cost (1992 US$/tC)

Figure 10 shows CO2 emission changes in non-Annex I countries in 2010 under the same three
scenarios. Carbon leakage is observed in many countries in the no trading case. For example, in 2010
the emission level of Singapore is 4.5% higher compared to the BaU case and that in Korea is 2.6%
higher. Carbon leakage in China is less than that in other countries.

250
Australia
Japan
USA
Canada
EU
EEFSU

200
150
100
50
0
1990

2010

2030

2050

Figure 5 Emission right prices (no trading case)

Marginal cost (1992 US$/tC)

200

150

Annex I
Global
Bubble/EU
Bubble/Annex I
Annex I+China, India

100

50

0
1990

2010

2030

2050

Figure 6 Emission right prices (trading case)7

Emission trading (GtC/year)

0.5
0.4
0.3

EEFSU
EU
CanadaUSA
Japan
Australia

0.2
0.1
0.0
-0.1
-0.2
-0.3
-0.4
-0.5
2000

2010

2020

2030

2040

2050

Figure 7 Emission right trading (Annex I trading case)

ROW
SS-Africa
ME-Asia
L-America
India
China
EEFSU
EU
CanadaUSA
Japan
Australia

Emission trading (GtC/year)

1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
2000

2010

2020

2030

2040

2050

Figure 8 Emission right trading (global trading case)8

CO2 emission change (%)

5
0
Japan
Australia
USA
Canada
EU
EEFSU

-5
-10
-15
-20
-25
-30
-35
No trading

Annex I

GlobalCO2 emission change (%)

Figure 9 CO2 emission changes in Annex I countries in 2010

5
4
3
2
1
0
-1
-2
-3
-4
-5

Korea
Singapore
China
India
L-America
ME-Asia
SS-Africa

No trading

Annex I

GlobalFigure 10 CO2 emissions changes in non-Annex I countries in 2010

3.3 Impacts on GDP
How much will the GDP losses be? Figure 11 shows a comparison of GDP losses in Annex I
countries under different scenarios in 2010. The GDP loss is 0.45% in the no trading case, higher
than for the other cases, in the USA. The GDP loss in the double bubble case is highest in the EU, at
about 0.35%. The impacts on GDP in the global trading case are the lowest in 2010 except for9

EEFSU. The GDP loss in EEFSU in the no trading case is 0.21%. EEFSU gains GDP in tradingcases, because the countries of that region sell emission rights. The GDP gain in the Annex I tradingcase is the largest for EEFSU, at about 3.5%. The GDP gain for EEFSU in the global trading case isabout 1.6%, which is less than in other trading cases. The GDP losses in the no trading with 5%
offset case are between those in Annex I trading and in no trading. Annex I trading has a muchgreater effect on GDP than in the no trading with 5% offset case.
Figure 12 shows GDP losses in non-Annex I countries. The GDP losses vary according to the country.
The GDP changes in China and Middle East Asia are negative, while those in Korea and India arepositive. The loss of Middle East Asia is the highest among these regions, and reaches its maximum
level in the no trading case.

4. Major Findings
Several interesting findings are obtained from this simulation.
(1) The marginal cost ranking is NZL, Japan, EU, and USA, in that order. The marginal costs of theUSA, EU, Japan, and NZL in the no trading case in 2010 are 153$, 198$, 234$, and 274$,
respectively. CO2 emission in NZL in the reference case is 11 MtC in 2010, and emissions must
be reduced to 7 MtC. As NZL has to reduce about 50% of its emissions, the marginal cost
becomes exceptionally high. Except for NZL, the marginal cost of Japan is the highest, followedby that of the EU. The highest GDP loss is observed in the USA. The percent GDP losses of theUSA, EU, and Japan in 2010 in the no trading case are 0.45%, 0.31%, and 0.25%, respectively,
while their percent energy reductions in 2010 are 22.5%, 14.8%, and 14.7%. The percent energy
reduction of the USA in 2010 is larger than those of the EU and Japan.
(2) Who earns by emission trading? Global trading has a great impact on GDP, with a much lower
marginal cost compared to other trading cases. The marginal cost in the global trading case is lessthan 40 US$ (1992) /tC, which is significantly less than that in the no trading case. EEFSU sells
emission rights, while the USA buys the largest amount of emission rights (207 MtC/year). Thisis 17% of the target and 53% of the total emission reduction in 2010. Japan will buy 57 MtC in
2010, representing 20% of the target emission and 71% of the emission reduction. Emission
reductions by trading will account for a large part of emission reductions if there is no limitation
on trading. The GDP gain of EEFSU in 2010 is the largest among the regions in trading cases.
(3) The GDP loss of the EU in the double bubble case is larger than that in the no trading case.
Double bubble has no merit for the EU.
(4) The GDP changes in China are negative in all cases while those in India and Korea are positive,
although the numbers are small at less than 0.4%. Non-Annex I countries are directly or
indirectly affected by the reduction strategies of Annex I countries. The GDP loss in Middle East
Asia is 1.5% in the no trading case. The GDP changes in Middle East Asia are negative in allcases.
Emission trading is effective in reducing CO2 emissions in the sense that it has less GDP impact.
Emission reductions by trading will account for a large part of the total emission reductions if there is
no restriction on trading. The Kyoto protocol states that the acquisition of emission reduction units
shall be supplemental to domestic actions which expresses anxiety that emission trading reduces
incentive of Annex I countries to introduce a substantial policy of greenhouse gas emission reduction.
It is essential to improve energy efficiency, to develop renewable energy, and to change the socioeconomic structure, so that fossil fuels will be less used.

10References
Hertel,T.W. (1995). Global Trade Analysis?Modeling and applications,Cambridge University
Press,1995.
IEA/OECD (1995). Energy statistics and balances of non-OECD countries 1992-1993, OECD.
IEA/OECD (1995). Energy statistics of OECD countries 1992-1993, OECD.
IMF (1997, 1998). World Energy Outlook, IMF.
Matuoka, Y., M. Kainuma and T. Morita (1995). Scenario analysis of global warming using the Asian
Pacific Integrated Model (AIM), Energy Policy, 23(4/5), 357-371.
McDougall, R. A. (1997). Global Trade Assistance, and Protection : The GTAP 3 Data Base, Center
for Global Trade Analysis Purdue University,1997.

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1% GDP Loss

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Japan
EU
EEFSU

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India
Korea
ME-Asiang% GDP Loss

Figure 11 Comparison of GDP losses in Annex I countries in 2010 under different scenarios

Figure 12 Comparison of GDP losses in non-Annex I countries in 2010 under different
scenarios.

12