DOES A CARBON TAX ON FOSSIL FUELS PROMOTE BIOFUELS?

Transcription

1 DOES A CARBON TAX ON FOSSIL FUELS PROMOTE BIOFUELS? Govinda R. Timilsina, Stefan Csordás & Simon Mevel The World Bank, Washington, DC 29 th USAEE/IAEE North American Conference Calgary, Canada October 14-16, 2010

2 Disclaimer The views expressed in this presentation are those of the authors only, and do not necessarily represent the World Bank and its affiliated organizations

3 Presentation Outline Introduction/motivation Brief overview of the model/data Simulated policies Key results Conclusions

4 Introduction Transport sector -- one of the main contributors to GHG -- offers very few alternatives to GHG reduction Biofuels could be an option; its current share is only around 2% Lack of a level playing field between fossil fuels and biofuels Carbon tax has been perceived as an instrument to promote biofuels Carbon taxation has been introduced in a number of countries and is under discussion in others This study examines the role of a carbon tax on biofuels penetration

5 Motivation A large number of studies on carbon tax starting early nineties The interactions between carbon tax and biofuels, particularly the feedback impacts through agriculture sector is missing

6 Methodology Multi-sector, multi-region, global recursive dynamic CGE model The model is flexible enough to accommodate new regions/countries or sectors and is calibrated with GTAP database Nested CES and CET functional forms to represent production behavior and land supply, respectively; Non-homothetic Constant Difference of Elasticities (CDE) function form for households Detailed representation of land-use and biofuel sectors Representation of bilateral and international trade

7 Methodology (Continue..) Figure 1: Nested CES structure of the model for production sectors

8 Methodology (Continue..) Figure 2: Nested CET structure for land supply

9 Methodology (Continue..) Figure 3: Nested CES structure of the model for energy demand

10 Data & Parameters Data are coming from the GTAP (Global Trade Analysis Project) database (Purdue University, Indiana) The database provides SAMs and international trade (bilateral flows, trade barriers) Database version 7.1 Year countries/regions 57 sectors

11 Regional and sector decomposition 1 Paddy rice 2 Sugar (cane & beet) 3 Vegetables, fruit 4 Wheat 5 Corn 6 Other cereal grains 7 Oilseeds 8 Livestock 9 Sugar Ethanol 10 Corn Ethanol 11 Grains Ethanol 12 Biodiesel 13 Processed food 14 Forestry 15 Coal 16 Crude oil 17 Natural gas 18 Other mining 19 Gasoline 20 Diesel 21 Refined oil 22 Chemicals 23 Other manufacturing 24 Electricity 25 Gas distribution 26 Construction 27 Transport services 28 Other services 1 Australia and New Zealand 2 Japan 3 Canada 4 United States 5 France 6 Germany 7 Italy 8 Spain 9 UK 10 Rest of EU & EFTA 11 China 12 Indonesia 13 Malaysia 14 Thailand 15 Rest of East Asia & Pacific 16 India 17 Rest of South Asia 18 Argentina 19 Brazil 20 Rest of LAC 21 Russia 22 Rest of ECA 23 MENA 24 South Africa 25 Rest of Sub-Saharan Africa Computational limitations require aggregation of countries/regions and sectors (GTAP: 112 regions & 57 sectors or 112* 57 = 6,384 equations for 1 variable only defined on 2 dimensions) Focus on main countries/regions producer of biofuels Keep as much detail as possible for agriculture (especially biofuel feedstocks) and for energy sectors

12 Baseline & Scenarios Base year: 2004 Baseline: includes already implemented mandates for biofuels; subsidies; key model variables (e.g., oil prices) are calibrated to actual values until 2009 Scenarios: Carbon tax uniform across countries: US$10/tCO 2 - US$100/tCO 2 ; introduced in 2012 and kept constant in nominal terms throughout the study horizon ( ) Tax revenue is recycled to households through lump-sum transfer

13 Global Biofuel Penetration 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% Baseline $10/tonne CO2 $25/tonne CO2 $50/tonne CO2 $100/tonne CO Baseline - 5.4% in 2020 (around 2% in 2009) With carbon tax: 5.6% US$25/tCO 2 ) and 6.1% (US$100/tCO 2 )

14 Biofuels Penetration - Country/Region (2020) 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% China Japan Indonesia Malaysia Thailand India Canada USA Argentina Brazil France Germany Italia Spain $100/tonne CO2 $50/tonne CO2 $25/tonne CO2 $10/tonne CO2 Baseline UK Russia South Africa Rest of EU & EFTA Rest of LAC Australia NZ Rest of EAP Rest of SA Rest of ECA MENA Rest of SSA At higher level of carbon tax (e.g., US$100/tCO 2 ), countries with higher carbon intensive economy, such as United States, China, Indonesia, Malaysia, Russia and South Africa, shows noticeable increase in their biofuel penetration The higher the tax rate, the higher would be drop in economic outputs and rebounds to biofuel penetration. In countries with less carbon intensive economy, such as Brazil, France, the carbon tax could even lead to reduction of their biofuel penetration.

15 Impacts of Carbon Tax on GDP (2020) A carbon tax leads to a loss of global real GDP, that increases with tax rate The losses would be much higher in the middle and low-income countries than highincome countries The GDP reductions are very large China, Russia, India, Argentina and MENA region % change from the baseline in 2020 US$25/tCO2 US$50/tCO2 US$100/tCO2 World total High-income Australia and New Zealand Japan Canada United States France Germany Italy Spain UK Rest of EU & EFTA Middle & Low-income China Indonesia Malaysia Thailand Rest of East Asia & Pacific India Rest of South Asia Argentina Brazil Rest of LAC Russia Rest of ECA MENA South Africa Rest of Sub-Saharan Africa

16 Impact on Sectoral Outputs (2020) % change relative to baseline for US$25/tCO 2 scenario Biofuels outputs expands (US$2.2 billion) but output from remaining sectors contracts (US$1,174 billion) The energy/mining sector suffers the greatest loss Manufacturing declines more where production is energy intensive (China, Russia, etc.) Reductions in agricultural outputs are higher than that in service sectors in most countries/region Agriculture Biofuels Primary energy /Mining World total High-income Australia and New Zealand Japan Canada United States France Germany Italy Spain UK Rest of EU & EFTA Middle & Low-income China Indonesia Malaysia Thailand Rest of East Asia & Pacific India Rest of South Asia Argentina Brazil Rest of LAC Russia Rest of ECA MENA South Africa Rest of Sub-Saharan Africa Manufacture Services

17 Impact on Agricultural Outputs Agricultural subsectors except those producing biofuel feedstock would experience losses in outputs In some countries, even sectors producing bifuel feedstock suffer with output loss % change relative to baseline for US$25/tCO 2 scenario Agriculture Paddy rice Sugar crops Other crops Wheat Corn Other coarse grains World total High-income Australia and New Zealan Japan Canada United States France Germany Italy Spain UK Rest of EU & EFTA Middle & Low-income China Indonesia Malaysia Thailand Rest of East Asia & Pacif India Rest of South Asia Argentina Brazil Rest of LAC Russia Rest of ECA MENA South Africa Rest of Sub-Saharan Afri Oilseeds Livestock

18 Sensitivity Analysis Higher carbon tax A carbon tax of US$150/tCO2 increases biofuel penetration by 0.3 percentage point (6.1% to 6.4%) at US$100/tCO2 and by 1 percentage point from the baseline with global GDP loss more than 2%. Doubled elasticity of substitution between biofuels and their fossil fuel counterparts The penetration of biofuels doubles not only on scenarios but also in the baseline; however, the difference between the carbon tax case and the baseline is still very small.

19 Policy Implications A separate study we did shows that direct subsidies to biofuels to meet announced targets in various countries around the world would increase biofuel penetration by 3.4 percentage point (from 5.6% in baseline to 9% in the scenario to meet the announced targets) in 2020 at a cost of 0.02% of global GDP. This study shows that a carbon tax of US$100/tCO2 would increase the biofuel penetration by 0.7 percentage point (from 5.6% in baseline to 6.1% in the carbon tax case) at much higher cost on GDP of 1.6%.

20 Conclusions In contrary to general perception, a carbon tax does not necessarily provides a level playing to biofuels if its the impacts on the overall economy are taken into account (significant losses of GDP and sectoral outputs) Policy measures directly aimed at the promotion of biofuels (e.g., mandates, subsidies) are more likely to achieve substantive increases in the market share of biofuels.

21 THANK YOU Govinda R. Timilsina Sr. Research Economist (Climate Change & Clean Energy) Development Research Group The World Bank 1818 H Street, NW Washington, DC 20433, USA Tel: Fax: gtimilsina@worldbank.org