Energy and Environmental Impact of Free Trade Agreements in ASEAN Region using a Global CGE Model Kakali Mukhopadhyay Department of Natural Resource Sciences Agricultural Economics Program McGill University, Macdonald Campus 21,111 Lakeshore Road, Ste Anne de Bellevue Montreal, Quebec, Canada-H9X3V9 Tel: 5143988651 Fax: 5143987990 [email protected] E3 system modeling and analysis of energy and environmental policy reforms in Asia organized by the Energy Studies Institute, National University of Singapore , February 2014

Structure • • • • • • •

Background Objective Literature Review Modeling Framework Analysis of Results Conclusion Suggestion for Future Research 2

Background • Over the past two decades, Asian countries have recognized the potential of regional economic integration and have started taking steps to benefit from it. • Sub-regional attempts of economic integration have occurred with ASEAN, SAARC and BIMSTEC and initiatives for broader economic integration are underway to push the agenda of regional economic integration. • The pace of economic integration is quickening in East and south east Asia, as revealed by the 3 growth in intra-regional trade.

• While the value of global trade grew seven times between 1990 and 2012, the value of regional trade in East Asia, comprising Japan, China, the Republic of Korea, Hong Kong, Taiwan and ASEAN countries, surged 10.8 times during the same period. • Asian economies face important policy challenges regarding the use of free trade agreements (FTAs): primarily their scope and their impact on regionalization trends.The move in the region is now toward concluding free trade agreements (FTAs) and economic partnership agreements (EPAs). • It is expected that an East-Asian multi-lateral regional trading community will be established by 2020. • There are some 575 Regional Trade Agreements (RTA) that have been notified to the GATT/WTO and 379 of them were in force as of July 2013 (WTO RTA gateway).

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Growth and environment Economic growth has often been accompanied by environmental degradation of both the national and international environment. East and south east Asian region has also been plagued with various environmental problems as a result of rapid industrialization and trade openness. 5

ASEAN economy The economies of the ASEAN are projected to grow 5.8 percent annually between now and 2030, according to the Asian Development Bank.

These rapidly growing nations will require 7.5 percent of the world’s energy supplies to do it.

Energy demand is already outstripping production in most of the ASEAN countries and remains heavily weighted towards hydrocarbons accounting for 97 percent of primary energy use, with renewables accounting for only 3 percent of consumption. 6

Status of energy Total coal production in the ASEAN region is 419 MTCE in 2012. Coal is a cheap and abundant source of energy in several of the ASEAN countries especially Indonesia and Vietnam, and will retain a large share of the region’s energy mix. Vietnam is the 2nd largest coal producer and only net exporter. Thailand , Philippines and Malaysia are importer of Coal.

Total natural gas production in the region is 202 bcm in 2012. Malaysia and Indonesia are also pioneers in LNG trade. Thailand and Singapore are reliant on LNG imports.

Southeast Asia becomes the world’s fourth-largest oil importer (behind China, India and the EU) & sees a vastly reduced surplus of natural gas for export. Brunei and Malaysia remain the only two net oil exporters in the region. 7

Oil Production million tonnes

Oil Consumption million tonnes

80 70 60 50 40 30 20 10 0

70 60 50 40 30 20 10 0 Brunei

Indonesia

Malaysia 2002

70 60 50 40 30 20 10 0

Thailand

Vietnam

2002

Natural gas consumption(mtoe)

2012

Natural Gas Production(mtoe)

50 40 30 20 10 0

2002 2002

2012

Coal Consumption (mtoe)

2012

Coal Production(mtoe)

2012

60 50

300

40

200

30

100

20 10

0 Indonesia

Thailand 2002

2012

Vietnam

0 Indonesia

Malaysia

Philippines 2002

2012

Thailand

Vietnam

8

ASEAN Plan of Action for Energy Cooperation ASEAN Plan of Action for Energy Cooperation (APAEC) 2010 – 2015 was developed by the ASEAN Center for Energy (ACE) and aims to enhance energy security, accessibility and sustainability for the ASEAN region by

1) the ASEAN Power Grid; 2) the Trans-ASEAN Gas Pipeline; 3) Coal and Clean Coal Technology; 4) Renewable Energy; 5) Energy Efficiency and

Conservation; 6) Regional Energy Policy and Planning; and 7) Civilian Nuclear Energy. 9

• ASEAN member states currently bringing up renewable energy vision into progressive actions under ASEAN Plan of Action for Energy Cooperation 2010-2015 by engaging more renewable activities and enhancing greater regional collaboration including achieving a collective target of 15% for regional renewable energy in the total power installed capacity by 2015. • They are also working to identify areas where clean and renewable energy can emerge and deploy to mitigate the adverse impact of the climate change as well. • Thailand is currently pushing the renewable energy as a national agenda supported by the master plan so called “Alternative Energy Development Plan (2008-2022)” by setting up the goal to increase a share of alternative energy mixed to be 20% of the country’s final energy demand in the year 2022. • Philippines has come up with Philippine Energy Plan emphasizing on self-sufficiency to strive for energy independence and intensifying use of renewable energy resources and alternative fuels for a cleaner environment. • For Malaysia, the Government announced the launching of the Small Renewable Energy Power Programme (SREP) to encourage and intensify the utilisation of Renewable Energy in power generation. 10

Objectives • To estimate the economic and environmental impacts of trade liberalization in ASEAN and ASEAN+3 by the year 2020. • To evaluate the implications of recent energy policy in the region.

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Literature Survey There are numerous studies on the impact of trade liberalization including WTO impact, economic effects of RTAs and its sectoral and regional implications, environmental as well as poverty implications. Studies attempted to address Regional Trade Agreements (RTAs) in Asia and pacific-JETRO (2003), Cheong(2003),Gosh and Yamarik(2004),Igawa and Kim(2005), Park(2006), Chawin(2006),Lee and Park(2004,2007), Urata and Kiyota (2003), Ando and Urata (2006), Scollay and Gilbert (2001), Park(2006), McKibbin, Lee and Cheong (2004), Chawin (2007), Srutt and Rae(2007), Thierfelder et al. (2007), Lochindratn(2007), Lendle (2007), Kawai and Wignaraja (2008), Manchin(2008), Mukhopadhyay and Thomassin (2008, 2009), Mukhopadhyay, Thomassin and Chakraborty(2009).

Recently an impact of CEPA between India and Japan has been attempted by Kawai, Bhattacharya and Mukhopadhyay (2010) and Mukhopadhyay and Bhattacharya(2011), Bhattacharya and Mukhopadhyay(2013). Impact of FTA between India, European Union and Latin American countries has been studied by Mukhopadhyay, Chakraborty and Thomassin(2011,2012). Literature on environment-trade linkage, an important objective in applied economic policy analysis, is growing. Kuik and Gerlag(2001), Kang and Kim(2004), Eickhout et al. (2004), Strutt and Anderson(2002), Dagoumas et al. (2006). Couple of studies in that direction done by Mukhopadhyay and Thomassin (2008a, 2009,2010,2010a) on the impact of East Asian free trade on the environment , Gumilang, Mukhopadhyay and Thomassin(2011) for Indonesia – Japan-ASEAN FTA and its impact on the environment using GTAP frame work.

Modeling framework Basic Structure of GTAP • The basic structure of the Global Trade Analysis Project (GTAP) model includes: industrial sectors, households, governments, and global sectors across countries. • Countries and regions in the world economy are linked together through trade. • Prices and quantities are simultaneously determined in both factor markets and commodity markets. • Five main factors of production are included in the model: labour (unskilled &skilled), capital, natural resource and land. 14

Structure of GTAP Household behaviour in the model is determined with an aggregate utility function. The private household buys bundles of commodities to maximise utility subject to its expenditure constraint. Firms minimize input costs given their level of output and fixed technology. The production side of the model assumes CRS and perfect competition. The model incorporates the Armington assumption. International trade is linked through Armington substitution among goods differentiated by country of origin. The transportation sector takes into account the difference in the price of a commodity as a result of the transportation of the good between countries. The global banking sector brings into equilibrium the savings and investment in the model. 15

Structure of GTAP • In equilibrium, all firms have zero real profit, all households are on their budget constraint, and global investment is equal to global savings. • Demand equals supply in all markets. • Changing the model’s parameter allows one to estimate the impact from a country’s/region original equilibrium position to a new equilibrium position.

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Modelling Approach • GTAP LATEST VERSION 8

• A recursive up-dating procedure is used to forecast the model for the period: 2008-2020. • Macroeconomic variables used to up-date the model • A number of trade liberalization scenarios are analyzed that incorporated economic integration based on: regional cluster, and degree of tariff reduction. 17

Aggregation scheme • The 129 countries in the GTAP framework are aggregated into 17 regions with an emphasis on the countries in the East Asian region. • 9 individual countries in East and south east Asia: Japan, Korea, China, Indonesia, Thailand, Vietnam, Malaysia, Philippines, and Singapore, were modeled • 3 most important upcoming countries for ASEAN India, Australia, New-Zealand • Rest of the other countries are aggregated into 5 other regions: ‘other ASEAN’, EU_27,NAFTA, rest of OECD, ROW. • 57 sectors have been aggregated to 30 on the basis of 18 export intensiveness.

Scenario Development Business As Usual Regional scope

Commodity Scope By 2020

12 countries and 5 regions

All Commodities

Current tariffs

Tariff reduction within ASEAN

Agriculture

80

Tariff reduction within ASEAN

Non Agriculture

100

Rest of the regions and countries(10) in the World

All Commodities

Current tariffs

ASEAN

ASEAN +3 Tariff reduction within ASEAN and Agriculture ASEAN individually with China, Japan and Korea

80

Tariff reduction within ASEAN and Non Agriculture ASEAN individually with China, Japan and Korea

100

Rest of the regions and countries(7) in the World

Current tariffs

All Commodities

19

Average Annual Real GDP growth 2007-2020 9 8 7 6 5 4 3 2 1 0

20

Percentage change in Real GDP for ASEAN and ASEAN +3 at 2020 relative to BAU 2020

1.4

1.2

1

0.8

0.6

0.4

0.2

0

-0.2 ASEAN

ASEAN3

21

Percentage change in Real Household Income for ASEAN and ASEAN+3 at 2020 relative to BAU 2020 4 3.5 3 2.5 2 1.5 1 0.5 0 -0.5

ASEAN

ASEAN+3

22

Percentage change in export and import growth at BAU 2007 to BAU 2020 Export

Import

Malaysia Indonesia Thailand Vietnam Singapore Philippines Rest of ASEAN Japan China

95.34 70.23 33.39 13.25 41.71 13.02 41.80 -10.45 98.82

94.73 68.04 33.20 14.79 41.58 12.76 41.91 -9.19 96.99

Korea India Australia NewZealand NorthAmerica EU_27 RestofOECD

42.51 29.72 85.93 65.09 1.67 18.54 26.59

42.69 30.72 85.59 66.32 -0.86 19.05 27.47

ROW

21.89

21.85

23

Percentage change in Export for ASEAN and ASEAN+3 at 2020 relative to BAU 2020 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 -1.00

ASEAN

ASEAN+3

24

Percentage change in Import for ASEAN and ASEAN+3 at 2020 relative to BAU 2020 8.00 7.00 6.00 5.00 4.00

3.00 2.00 1.00 0.00 -1.00

ASEAN

ASEAN+3

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Major sectors output in ASEAN+3 2020 Indonesia

Coal

Thailand

Singapore

Petroleum Paddy Crops products

Malaysia Food Products

Vietnam

Philippines

Paddy Crops

Electronics

Petroleum products

Oil

Machinery Equipment

Oil Chemical Rubber and Plastic

Food Products Other Metals Chemical Textile and Rubber and apparel Plastic

Electronics

Textile and apparel

Gas Textile and apparel

Chemical Live stock and Rubber and meat Plastic Food Products Electronics Petroleum products

Electronics

Chemical Rubber and Plastic

Machinery Equipment

Textile and apparel

Petroleum products

Electronics

Chemical Rubber and Plastic

Oil

Chemical Rubber and Plastic

Food Products Electricity

Rest of ASEAN

Gas

Food Products Textile and apparel Electricity

Food Products Transport

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Major sectors Export in ASEAN+3 2020 Malaysia

Electronics Machinery Equipment

Singapore

Philippines

Electronics Electronics Machinery Machinery Equipment Equipment

Indonesia

Textile and apparel Coal

Chemical Rubber and Plastic

Petroleum products

Food Products

Food Products

Chemical Rubber and Plastic

Chemical Rubber and Plastic Gas

Transport

Other Metals

Oil Gas

Lumber Wood

Oil

Mining Ext Food Products Chemical Rubber and Plastic Machinery Equipment Manufacturers Other Metals

Thailand

Vietnam

Rest of ASEAN

Textile and Food Products apparel Oil Petroleum Leather products Products Gas Chemical Textile and Rubber and apparel Plastic Oil Textile and apparel

Food Other Products Industry Chemical Rubber and Paddy Crops Plastic Motor vehicles Machinery and parts Equipment

Electronics Machinery Equipment Manufacturers 27

Welfare impact at ASEAN and ASEAN+3 at 2020 (million USD) 3500 3000 2500 2000 1500 1000 500 0 -500 -1000

ASEAN

ASEAN+3

28

Status of Energy sector in ASEAN and ASEAN+3 at 2020 Petroleum products – Malaysia, Singapore, Philippine, Thailand(1-5% increase) Coal, oil and gas—Indonesia (4-11% increase) and Vietnam (5-10% increase) Oil and Gas – Thailand (5-8% increase) Gas – Rest ASEAN (6-8% increase)

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Average Annual CO2 Emission Growth BAU 2007-2020 9 8 7 6 5

4 3 2 1 0 Malaysia

Indonesia

Thailand

Vietnam

Singapore

Philippines

RestofASEAN

30

Generation of additional CO2 from BAU export and output to ASEAN and ASEAN+3 at 2020 ASEAN+3 ASEAN Export MTCO2 MTCO2 Malaysia 0.65 0.219 Indonesia 1.64 0.432 Thailand 1.91 0.69 Vietnam 1.99 0.213 Singapore 0.085 0.078 Philippines 0.29 0.217 RestofASEAN 0.22 0.069

Output Malaysia Indonesia Thailand Vietnam Singapore Philippines RestofASEAN

ASEAN+3 ASEAN MTCO2 MTCO2 0.617 0.394 2.949 0.621 2.741 0.699 3.267 0.355 0.136 0.108 0.385 0.29 0.156 0.095

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Additional CO2 emission growth at ASEAN and ASEAN+3 at 2020 7

6

5

4

3

2

1

0 Malaysia

Indonesia

Thailand

Vietnam ASEAN

Singapore

Philippines

RestofASEAN

ASEAN+3

32

Energy efficiency goal-ASEAN Brunei Darussalam Attain 25% reduction of energy intensity from 2005 level by 2030 Cambodia Reduce final energy consumption by 10% in all sectors Myanmar Reduce primary energy consumption by 5% in 2020 and 8% by 2030 compared to BAU • Improve energy efficiency in all end-use by 16% by 2030 Philippines Reduce final energy consumption by 10% in all sectors Thailand Save 22% of total energy in 2030 relative to BAU Vietnam Reduce energy consumption by 3%-5% by 2010 and between 5%-8% by 2010-2015

Indonesia Reduce final energy consumption by 1% per year from the BAU scenario Lao PDR Reduce final energy consumption by 10% in all sectors Malaysia Reduction of final energy consumption in the industrial, commercial and residential sectors by 10% from 2011 to 2030 • Reduce the final energy consumption of the transportation sector by 1.39 ktoe in 2030 by modal and fuel switching from gasoline to electricity rail transport and electric vehicles • Reduce final energy consumption by 10% in all sectors Singapore Reduce energy intensity by 20% by 2020 and by 35% by 2030 from the 2005 level. • Cap CO2 emissions from combustion of fuel at 63 Mt-CO2 in 2020. 33

Fuel subsidy…. Fossil-fuel subsidies amounted to $51 billion in 2012(IEA 2013)

Despite recent reforms – notably in Indonesia & Malaysia – they continue to distort energy markets…

Reviewing the Energy efficiency Goal in the region, a 15% target subsidy reduction in energy sector across the region has been attempted 34

% Change in CO2 reduction due to energy tax BAU

ASEAN

0 0 -1

-0.5

-2

-1

-3

-1.5

-4

-2

-5

-2.5 -3

-6 COGTAX

-3.5

ELECTAX

ASEAN+3

COGTAX

ELECTAX

0 -0.5 -1 -1.5 -2 -2.5 -3

-3.5 -4 COGTAX

ELECTAX

35

Effect of Energy policy on other economic factors at ASEAN +3 at 2020

Reduction in subsidy on coal, oil and Gas and Electricity Percentage change in EXPORT

Percentage change in OUTPUT

Countries

COGTAX

ELECTAX

Countries

COGTAX ELECTAX

Malaysia Indonesia

0.3597 0.7668

0.3128 0.3428

Malaysia

-0.2342

-0.0193

Indonesia

-0.0989

-0.3288

Thailand Vietnam

0.4085 0.5822

0.5185 1.6563

Thailand

-0.0406

-0.1730

Singapore

0.1657

0.0727

Vietnam

-0.2098

-0.5052

Philippines

0.1756

1.1851

Singapore

0.0763

-0.0635

Philippines

-0.1831

0.2412

RestofAsean

0.7268

0.4568

RestofAsean -0.4401

-0.4091

36

Effect of Energy policy on other economic factors at ASEAN+3 at 2020

Reduction in subsidy on coal, oil and Gas(COGTAX) and Electricity(ELECTAX) Percentage change in household income

Welfare Impact

Million USD

Million USD

Countries

COGTAX

ELECTAX

Malaysia

-0.6235

-0.0061

Malaysia

COGTAX ELECTAX -521.985 -248.672

Indonesia

-2.2306

-0.0434

Indonesia

-630.298 -289.602

Thailand Vietnam

-0.2459 -0.478

-0.2091 -0.7914

Thailand

-262.729 -370.548

Vietnam

-49.889 -455.065

0.1018 -0.106

0.053 0.0453

Singapore

116.8206 -81.0674

Philippines

-70.3592 -196.928

-2.6225

-0.0811

RestofAsean

-85.5947 -58.0894

Singapore Philippines RestofAsean

37

Conclusion  ASEAN economic integration will increase Real GDP growth of the countries included in the agreement.  Other countries in the world will have a very marginal impact on GDP growth.  GDP growth will be highest for Vietnam followed by Malaysia and Thailand in ASEAN+3 at 2020.  Real household income will also remain high for Vietnam followed by Thailand and Indonesia.  Vietnam is estimated to achieve the highest export and import growth followed by Indonesia, Thailand and Rest of ASEAN at both scenarios.  Output share increased for Chemical Rubber and Plastic and Electronics across the region.  Food products output share is also expected to increase almost all ASEAN countries except Singapore  Textile and wearing apparel will also be dominating except Singapore and Malaysia  Major export item in the region will be Chemical Rubber and Plastic , Electronics, Machinery and equipment and Textile and wearing apparel due to ASEAN+3 integration at 2020  ASEAN+3 is favourable for most of the ASEAN countries compared to only ASEAN integration. 38

 Under the ASEAN+3 scenario, Japan, Korea and Thailand are the 3 regions with the most welfare increase.  Thailand appears to gain most welfare from trade liberalization in the ASEAN region.  CO2 emission growth ranges from 3% to 9% p.a. across the region at BAU level having Singapore the lowest and Vietnam the highest.  The effect of economic integration on the environment is moderate in case of ASEAN, while ASEAN+3 integration will add marginal emission in the region .  Environmental impact is not too encouraging for Vietnam.  ASEAN+3 integration tends to be beneficial for the ASEAN countries. 39

 Energy subsidy reduction shows a modest CO2 reduction for Singapore and lowest for rest ASEAN, and Malaysia in ASEAN+3 at 2020.  Energy subsidy reduction has a marginal negative impact on output growth of the region(except Singapore) while a positive impact on export.  Some negative welfare impact is observed(except Singapore) in the ASEAN region along with household income. 40

Suggestions for future research A comprehensive and integrated plan should be initiated by the Energy Studies Institute, NUS to study the implications of ASEAN’s Energy efficiency goal including trade agreements for individual countries and region as a whole involving Governments, academic institutions and NGOs.

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Thank you

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