JapanKoreaChina E3 Econometric Simulation of CDM through FDI: Energy Saving Investment of Japanese F

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Japan-Korea-China E3 Econometric Simulation of
CDM through FDIEnergy Saving Investment of
Japanese Firms in China
17th Northeast Asia Economic Forum Tianjin, China
26-29 October 2008

• Mitsuo Yamada
• Department of Economics
• Chukyo University,
• Nagoya, JAPAN
• yamada_at_mecl.chukyo-u.ac.jp

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1 Background and Motivation

• East Asian Economies, called Economic Center of
  Growth by World Bank, are expanding their
  economies.
• Japan, Korea, and China are the core countries of
  this area.
• Japan has to attain the KP goal in 2008-2012, and
  thereafter has to create further energy saving
  society.
• Decreasing huge Energy Use without losing
  economic development is an important issue for
  China.
• Concentrating the resources into the advantageous
  sector, Korea seeks the way to keep technological
  advantage in the world market.
• Economies of these countries are closely
  connected, and their policy actions affect not
  only the own economy but also neighbors.
• Developing an E3 econometric model, we conduct
  some simulation analysis for energy saving
  economies.

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Issues for China

• Improving energy efficiency without losing
  economic growth.
• How attained?
• Clean Development Mechanism (CDM)
• Government-based cooperative activities
• Technology transfer through Foreign Direct
  Investment (FDI)

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Issues for Korea

• Relatively smaller population than the other
  countries means small resource and small domestic
  market.
• International trade and overseas production are
  important for Korea.
• Concentrating the resources into the advantageous
  sector, Korea seeks the way to keep technological
  advantage in the world market.

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Issues for Japan

• About 12 reduction in GHG emission is needed to
  attain the Kyoto target in 2010.
• Further improvement of energy efficiency will be
  required after KP.
• Voluntary efforts in the domestic economy
• Use of Kyoto Mechanism( CDM, JI, ET )
• Introduction of Environmental Taxes

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2 Comparison of the Three Economies
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Net Export in 2000 Asia I-O Table
Foreign Direct Investment in 2003
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Comparison of the Three Economies

• Economic Scale and Growth
• Japan is the biggest among the three countries.
• China grows faster than Japan and Korea.
• Koreas GDP per capita becomes one-third of
  Japans one.
• International Trade
• Trade among the three countries is not so large
  in scale.
• Japan and Korea compete in the trade of transport
  equipment.
• The three countries compete in trade of the
  electrical machinery, though they produce
  cooperatively in some parts.
• Capital Flow
• In China, Japan and Koreas investment becomes
  large recently.
• They contributes to the growth of China.

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Comparison of the Three Economies

• Energy
• Korea is energy use per capita expands to the
  almost same level of Japan.
• Chinas energy use is the largest among them,
  though energy use per capita is lower than those
  in Japan and Korea.
• Japans Energy Use per GDP seems almost stable
  comparing the other countries.
• GHG emissions
• Chinas CO2 emission is the biggest among them.
• Koreas CO2 emission per capita becomes almost
  same as that in Japan.
• CO2 emission per GDP in China has declined,
  though it is still larger than those of Japan and
  Korea.

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Our Research Interest

• Overseas production of Japanese firms is
  expanding.
• One-third of Japanese FDI is brought in East
  Asian region.
• Some Japanese firms starts to seek the
  possibility to introduce high-energy efficient
  technology into the own overseas factories to
  reduce energy consumption and to attain CO2
  emission right through CDM.
• Panasonics case
• In ten factories of electrical machinery in
  Malaysia, they invested energy saving CDM
  projects to attain emission right of 8,100 ton
  per year for ten years.
• In China, they have the same plan of introducing
  energy saving CDM projects to attain the emission
  right of 5,000 ton per year, which is the amount
  of 2.5 emission in their factories in Japan.

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Our research interest

• Japanese firms is competing with Korean firms in
  the electrical machinery market.
• They have invested in China and have produced
  their products and parts mainly to reduce
  production costs.
• Such foreign investment in China induces
  intra-industrial trade among them.
• Japanese firms start to introduce energy-saving
  technology into the own overseas factories to
  attain CO2 emission right.
• Approving as CDM project is important motivation
  for such investment of the private firms.
• To introduce energy-saving technology into
  Chinese economy, it might become one of important
  measures.
• We would like to evaluate not only social effects
  of such CDM projects in China but also induced
  impacts on Japan and Korea.

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3 Model and Simulation

• Our model( KY-MERIT-E3 ) consists of
• Three countries sub-models Japan, Korea and
  China
• One sub-model of international trade.
• Each countrys sub-model is developed as an E3
  multi-sectoral model, which integrates a macro
  model and an input-output model into one model,
  including energy and environment parts.
• There are 21 sectors in each countrys model
• KY-MERIT-E3 Kinoshita-Yamada Multi-sectoral and
  Multi-regional Econometric Model for the Research
  on Industry and Trade E3 version

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Figure The structure of the Model KeYMERIT-E3
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Figure Economy (Macro Sectors) Part
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Figure The Energy Environment Parts
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4 Simulation and the Results

• Some Japanese companies invest to settle
  energy-saving equipment in their own factories in
  China using CDM mechanism.
• Their main purpose is both saving the production
  cost and acquiring certification to CO2 emission
  right.
• The more they might to shift the production
  factories to China, the more they have burden to
  reduce CO2 emission in Japan.
• For China, such FDI might become one of the
  important measures to introduce energy-saving
  technologies in its own country, because such
  investment mainly reduces the demand of
  electricity.

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• Simulation assumption
• Shift the production from Japan to China by one
  percent of Chinese production in electric
  machinery sector.
• Decrease in the electricity-efficiency by 10
  percent for the additional Japanese overseas
  production in the same sector.
• Investment factor is important because it induce
  further production which offset the energy-saving
  effect. However, we ignore the effect because of
  lack of the data.

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Changes from the base, the 7th period in the
Simulation
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• Japanese companies of electrical machinery sector
  invest in China and expand their production by 1
  percent amount of electrical machinery production
  in China.
• This expansion requires additional demands of
  intermediate input mainly in China. Textile and
  miscellaneous manufacturing product are induced,
  0.121 percent and 0.218 percent in the 7th period
  respectively. Total product in China increases
  0.12 percent in China
• For GDP base, nominal GDP in China, rises by
  0.303 percent, the real GDP decreases by 0.160
  percent, because of increase in GDP deflator by
  0.5 percent.

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• Through the international trade, production in
  Japan and Korea is increased. This impact is
  stronger in Korea than in Japan.
• Though production of electrical machinery in
  Japan is shifted to China, it increases by 0.024
  percent. The total production in Japan rises by
  0.005 percent. Prices do not rise so much.

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• Japanese electrical machinery companies improve
  the electricity consumption in their own
  factories in China by 10 percent.
• Chinese final consumption of electricity is saved
  by 0.041 percent, and primary energy supply is
  reduced by 0.05 percent, which brings the
  reduction in CO2 emission, 0.055 percent in the
  7th period.
• In Japan and Korea, both electricity consumption
  and primary energy consumption increase. This
  effect is bigger in Korea than in Japan.
• The reduction in Chinese energy consumption is
  larger than the increase in both Japanese and
  Korean energy consumption in summation.
• So we expect that the reduction in CO2 emission
  of Japan, Korea, and China as a whole.

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Concluding Remarks

• Even if the production shift from Japan to China
  is happened, the domestic production would not
  decrease in Japan, because import demand from
  China offset the reduction of the production.
• The energy saving activities in electrical
  machinery sector in China brings the reduction of
  the energy consumption in the economy as a whole,
  so the reduction in CO2 would be expected in
  China.
• The energy consumption in Japan and Korea might
  be increased a little bit, but not so large
  comparing the reduction in China.
• Then we expect that the energy consumption in
  three counties would be reduced, which brings
  reduction in CO2 emission in three countries, as
  a whole.

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• This means that there are some rooms for three
  countries to act cooperatively to promote such
  activities of the private sectors.
• Using an E3 econometric model linking Japan,
  Korea, and China, our simulation analysis focus
  on the evaluation of production shift of Japanese
  companies from Japan to China and their
  energy-saving investment
• However, in this analysis, we dont include the
  effect through investment demand increase,
  because of lack of sufficient information on the
  cost of the investment, which we have to improve
  in the next research.
• We should consider not only partial effect on the
  firms that invest CDM project to attain CO2
  emission right but also social impact on the
  economy as a whole.