A review of subsidy and carbon price approaches to greenhouse gas emission reduction

The Climate Institute requested SKM MMA and Centre of Policy Studies (CoPS) to undertake an assessment of alternative policy options to achieve a given carbon emission target in Australia. The focus of the study was to compare outcomes under a suite of subsidy based policies to the outcomes under an emission trading scheme. The outcomes of the study are presented in this report.There are several market based approaches that could be used to achieve a carbon emission target. Which approach is more or less effective in achieving the target will depend on any restriction placed on the measure, the ability of each approach to manage the uncertainties on the cost and future scale of abating carbon emissions, the long term behavioural signals provided and the relative impacts on the broader economy.In principle, a subsidy scheme, such as the proposed Emission Reduction Fund (ERF), could achieve the same level of abatement at a similar cost to an emission trading scheme provided the sectoral coverage was the same and the eligible abatement options were the same. Any difference in effectiveness and cost may be due to other factors such as a limit on the budget available to be spent through the subsidy scheme and differences in sectoral coverage. Whether projects receiving funding under the subsidy scheme will proceed or go under either before they are built or after a few years of operation, as has happened under other subsidy scheme, is also important to the effectiveness of the scheme.SKM MMA used a marginal abatement cost approach to assess the options chosen under the subsidy fund. The approach was used to assess a range of emissions abatement opportunities in a range of sectors covering energy, transport, agriculture and land use change, industrial processes, fugitive emissions, and waste. The approach involved the assessment of the cost and potential emission abatement of the eligible options. The assumption was that the lowest cost combination of options is selected under the fund to meet the abatement cap up to any budget or other declared constraints. Only options that are additional (i.e. would not have proceeded in absence of the fund or carbon abatement incentive) were considered.The estimated level of abatement by options and their cost are input into CoPS’s Monash Multi Regional Forecasting Model (MMRF)to determine broader economic impacts.This report outlines the assumptions and method used and discusses the result of the modelling. Limitations and uncertainties in the approach are also outlined. The focus of the analysis was on potential impacts – there is no discussion on which approach is more efficient

THE COMPETITIVENESS IMPACT OF A MULTILATERAL ELECTRICITY GENERATION TAX

The South African Government announced, in the 2008 Budget Review, the intention to tax the generation of electricity from non-renewable sources with 2c/kWh. This tax is to be collected by the producers/generators of electricity at the source. The intention of the tax is to serve a dual purpose of managing the potential electricity shortages in South Africa and to protect the environment. The primary objective of this paper is to evaluate the impact of an electricity generation tax on the international competitiveness of South Africa. Specifically, different scenarios are assessed to establish whether the loss of competitiveness can be negated through an international, multilateral electricity generation tax. The paper firstly considers the beneficial impact of environmental taxation on the competitiveness of a country. We subsequently apply the Global Trade Analysis Project (GTAP) model to evaluate the impact of an electricity generation tax on the competitiveness of South Africa, given multilateral taxes on SACU, SADC and European Union economies. We simulate the proposed tax as a 10 percent increase in the output price of electricity. We assume a closure rule that allows unskilled labour to migrate between sectors and a limited skilled workforce. As expected, a unilateral electricity generation tax in South Africa will adversely affect the competitiveness of the South African economy and slightly improve the competitiveness of the other SACU and SADC economies. However, if a multilateral tax is imposed throughout the SACU and SADC countries, South Africa will experience a marginally greater loss of competitiveness compared to a unilateral tax. At the same time the rest of the SACU and SADC countries will experience a loss of competitiveness. The benefit of emission reduction in South Africa will also be lower under these multilateral tax scenarios. The competitiveness effect on the South African economy as well as emission reduction will be more moderate under a multilateral South Africa/EU electricity generation tax than under a unilateral South African tax.

The impact of an electricity generation tax on the South African economy

In the 2008 budget of the Minister of Finance, the South African Government proposed to impose a 2 cents/kilowatt-hour (c/kWh) tax on the sale of electricity generated from non-renewable sources; this tax is to be collected at source by the producers/generators of electricity. The intention of this measure is to serve a dual purpose of protecting the environment and helping to manage the current electricity supply shortages by reducing demand. The objective here is to evaluate the impact of such an electricity generation tax on the South African, SACU and SADC economies. The paper firstly considers the theoretical foundations of an electricity generation tax supported by international experiences in this regard. This section also contrasts the suitability of a permit with a tax system to achieve CO2 emission reduction. We subsequently apply the Global Trade Analysis Project (GTAP) model to evaluate the impact of an electricity generation tax on the South African, SACU and SADC economies. We simulate the proposed tax as a 10 percent increase in the output price of electricity. We assume a closure rule that allows unskilled labour to migrate and a limited skilled workforce. As expected, the electricity generation tax will reduce demand. Due to the decrease in domestic demand, export volume increases and import volume decreases, this is despite a weaker terms of trade. We also found that unemployment for unskilled labour increases and wages of skilled workers are expected to decrease. A unilateral electricity generation tax will benefit other SACU and SADC countries through an improvement in relative competitiveness, as shown by the improvement of the terms of trade for these regions. If, however, the benefits of pollution abatement are internalised, then electricity generation tax is expected to yield a positive effect on the South African economy.

THE ECONOMIC AND ENVIRONMENTAL IMPACTS OF INCREASING THE IRISH CARBON TAX. ESRI RESEARCH SERIES NUMBER 79 OCTOBER 2018

This study investigates the economic and environmental impacts of increasing the current carbon tax in Ireland from C20 per tonne of CO2 to C25, C30, C35 and C40. For this purpose, an Energy Social Accounting Matrix (ESAM) is developed for Ireland with 33 activities, 39 commodities, and ten household groups based on disposable income. The ESAM reproduces the structure of the Irish economy including production sectors, households and the government and quantifies the nature of all existing economic transactions among the diverse economic agents. Furthermore, the ESAM includes the flows of energy and emissions, creating a framework that can examine how money as well as energy and emissions flows between production sectors, households and the government. In this way the carbon content of different products and different households’ consumption is estimated. The current carbon tax in Ireland stands at C20 per tonne of carbon and is levied to incentivise households and producers to reduce their use of carbon-intensive goods. The carbon tax is relatively low, however, and constitutes just 1.9 per cent of total taxes levied on commodities in Ireland. Carbon tax accounts for only 7.6 per cent of total excise duties levied on petrol and 14 per cent of all excise duties on diesel. Our results reveal that increases in the carbon tax affect the prices of diesel and petrol the most. A C5 increase will increase the prices of carbon commodities by on average 0.8 per cent, and a doubling of the carbon tax to C40 per tonne of CO2 will increase the prices of carbon commodities by on average 3.4 per cent. The diesel price is expected to increase the most due to an increase in the carbon tax, whereby a C25 tax would result in a 1.7 per cent increase in diesel prices. A C40 tax would result in a 7 per cent increase in diesel prices. Putting this into context, it can be noted that in 2018 alone consumers have faced much greater fluctuations in diesel prices. Consumers are accustomed to relatively large fluctuations in fuel prices and may not react to increases in prices, assuming prices will fall again. This makes it extremely important to communicate a clear commitment to an increasing carbon tax by the government

Optimization Models for Sustainable Design and Management of Biopower Supply Chains

This dissertation presents optimization models to aid with the sustainable design and management of biopower (biomass cofiring) supply chains. We address three main challenges associated with today’s biopower projects: i) high cost of biomass collection, storage and delivery, ii) inefficiency of the mechanisms used to incentivize biomass usage for generating electricity, and iii) lack of clear understanding about the trade-offs between economic and environmental impacts of biopower supply chains. In order to address the high cost of delivering biomass, we present a novel mixed integer nonlinear program that integrates production and transportation decisions at power plants. Proposed model captures the loss in process efficiencies from using biomass, in-vestment and operational costs associated with cofiring, and savings due to production tax credit (PTC), a major governmental incentive to support biopower. We develop a La-grangian relaxation approach to provide upper bounds, and two linear approximations to provide lower bounds for the problem. An important finding is that the one-size-fits-all approach of PTC is not effective in motivating plants to utilize biomass and there is a need for sophisticated incentive schemes. In order to address the second issue, we propose alter-natives for the existing PTC incentive. The proposed flexible alternatives are functions of plant capacity and biomass cofiring ratio. We use a resource allocation framework to model and analyze the profit-earning potentials and fairness of the proposed incentive schemes. Finally, in order to address the last challenge, we propose a stochastic biobjective optimiza-tion model to analyze the economic and environmental impacts of biopower supply chains. The economic objective function maximizes the potential profits in the supply chain and the environmental objective function minimizes the life cycle greenhouse gasses (GHG). We use a life cycle assessment (LCA) approach to derive the emission factors for this objective function. We capture uncertainties of biomass quality and supply via the use of chance constraints. The results of this dissertation work are useful for electric utility companies and policy makers. Utility companies can use the proposed models to identify ways to improve biopower production, have better environmental performance, and make use of the existing incentives. Policy makers would gain insights on designing incentive schemes for a more efficient utilization of biomass and a fairer distribution of tax-payers money

A CGE-Analysis of Energy Policies Considering Labor Market Imperfections and Technology Specifications

The paper establishes a CGE/MPSGE model for evaluating energy policy measures with emphasis on their employment impacts. It specifies a dual labor market with respect to qualification, two different mechanisms for skill specific unemployment, and a technology detailed description of electricity generation. Non clearing of the dual labor market is modeled via minimum wage constraints and via wage curves. The model is exemplarily applied for the analysis of capital subsidies on the application of technologies using renewable energy sources. Quantitative results highlight that subsidies on these technologies do not automatically lead to a significant reduction in emissions. Moreover, if emission reductions are achieved these might actually partly result from negative growth effects induced by the promotion of cost inefficient technologies. Inefficiencies in the energy system increase unemployment for both skilled and unskilled labor.CGE, Energy Economic Analysis, Employment Impact, Choice of Technology

The Extension of the RAINS Model to Greenhouse Gases

Many of the traditional air pollutants and greenhouse gases have common sources, offering a cost-effective potential for simultaneous improvements for both traditional air pollution problems as well as climate change. A methodology has been developed to extend the RAINS integrated assessment model to explore synergies and trade-offs between the control of greenhouse gases and air pollution. With this extension, the RAINS model allows now the assessment of emission control costs for the six greenhouse gases covered under the Kyoto Protocol (CO2, CH4, N2O and the three F-gases) together with the emissions of air pollutants SO2, NOX, VOC, NH3 AND PM. In the first phase of the study, emissions, costs and control potentials for the six greenhouse gases covered in the Kyoto Protocol have been estimated and implemented in the RAINS model. Emission estimates are based on methodologies and emission factors proposed by the IPCC emission reporting guidelines. The large number of control options for greenhouse gases have been grouped into approximately 150 packages of measures and implemented in the RAINS model for the European countries. These control options span a wide range of cost-effectiveness. There a re certain advanced technical measures with moderate costs, and certain measures exist for which the economic assessment suggests even negative costs, if major side impacts (cost savings) are calculated. Illustrative example calculations clearly demonstrate that conclusions on the cost-effectiveness of emission reduction strategies are crucially depending on the boundaries of the analysis. The net cost of greenhouse gas control strategies are significantly lower if the immediate cost-savings from avoided air pollution control costs are taken into consideration. For a 15 percent reduction of the CO2 emissions from the power sector in the EU, avoided pollution control costs could compensate two third of the CO2 control costs. Depending on the design of the control strategy, net costs of greenhouse gas mitigation could even be negative, which is in stark contrast to conclusions for a CO2 only strategy. However, there are certain greenhouse gas mitigation measures, such as increased use of biomass that could deteriorate the negative impacts of air pollution, while yielding very little economic synergies. A combined approach towards greenhouse gas mitigation and air pollution control would not only reveal economic synergies, but also harness additional environmental benefits. Even in a situation with stringent emission control requirements for air pollution as it is required by the EU legislation, modifications in fuel use geared towards reductions of greenhouse gases could lead as a side impact to significant reductions in the residual emissions of air pollutants. The economic benefits of such "windfall emission reductions" could be substantial. The extended RAINS model framework will offer a tool to systematically investigate such economic and environmental synergies between greenhouse gas mitigation and air pollution control while avoiding negative side impacts

The GAINS Model for Greenhouse Gases: Emissions, Control Potentials and Control Costs for Methane

This report estimates current and future emissions of methane in 42 regions in Europe, assesses the potential for reducing emissions and quantifies the costs of the available emission control measures. The report identifies 28 control measures, ranging from animal feed changes over waste management options to various approaches for gas recovery and utilization. For each of these options, the report examines country-specific applicability and removal efficiency and determines the costs. As a result, methane emissions in Europe are estimated for the year 1990 at 64,200 kt CH4. Assuming the penetration of emission controls as laid down in the current legislation, emissions would decline up to 2020 by 11,700 kt CH4 per year. Full application of the presently available emission control measures could achieve an additional decline in European methane emissions by 24,000 kt per year. 75 percent of this potential could be attained at a cost of less than two billion Euros/year or 50 Euros/t CO2-equivalent, while the further 5,000 kt CH4/year would require costs of 12 billion Euros/year

The GAINS Model for Greenhouse Gases - Version 1.0: Methane (CH4)

Many of the traditional air pollutants and greenhouse gases have common sources, offering a cost-effective potential for simultaneous improvements of traditional air pollution problems and climate change. A methodology has been developed to extend the RAINS integrated assessment model to explore synergies and trade-offs between the control of greenhouse gases and air pollution. With this extension, the GAINS (GHG-Air pollution INteraction and Synergies) model will allow the assessment of emission control costs for the six greenhouse gases covered under the Kyoto Protocol (CO2, CH4, N2O and the three F-gases) together with the emissions of air pollutants SO2, NOx, VOC, NH3 and PM. This report describes the first implementation (Version 1.0) of the model extension model to incorporate CH4 emissions. GAINS Version 1.0 assesses the options for reducing N2O emissions from the various source categories. It quantifies for 43 countries/regions in Europe country-specific application potentials of the various options in the different sectors of the economy, and estimates the societal resource costs of these measures. Mitigation potentials are estimated in relation to an exogenous baseline projection that is considered to reflect current planning. The report identifies 28 control measures, ranging from animal feed changes over waste management options to various approaches for gas recovery and utilization. For each of these options, the report examines country-specific applicability and removal efficiency and determines the costs. As a result, CH4 emissions in Europe are estimated for the year 1990 at 63,600 kt CH4. Assuming the penetration of emission controls as laid down in the current legislation, emissions would decline up to 2020 by 12,600 kt CH4 per year. Full application of the presently available emission control measures could achieve an additional decline in European CH4 emissions by 24,000 kt per year. Seventy percent of this potential could be attained at a cost of less than two billion Euro/year or Euro/ton CO2- equivalent, while the further 7,000 kt CH4/year would require costs of 12 billion Euro/year