Cooperative Policy Mechanism to Promote China s Renewable Energy Consumption based on CGE Model Abstract 1 Introduction

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1 Cooperative Policy Mechanism to Promote China s Renewable Energy Consumption based on CGE Model by Yongxiu He, Yuexia Pang School of Economics and Management North China Electric Power University Beijing PRC, Phone: /Fax: / heyongxiu@ncepu.edu.cn Abstract In recent years, with the large-scale and centralized development of the wind power and photovoltaic power industry in China, wind power and photovoltaic power curtailment have become increasingly serious. In the first quarter of 2015, the rate of abandoned wind is 18.6%, which is the highest in the history. At the same time, the development of photovoltaic power is also not optimistic. For example, in the first half year of 2015, the quantity of abandoned photovoltaic is 1.8TWh. In order to construct a low carbon, efficient and sustainable modern energy system, and promote renewable energy consumption, a favorable policy coordination mechanism has become the urgent demand. From the cooperative perspective of price, subsidy and tax policy, this paper discusses the coordinative policy mechanism to promote the renewable energy consumption based on the balance of supply and demand and the CGE model. First of all, under the background of the electric power system deepening reform in China, this paper establishes the price incentive model based on game theory considering the balance of supply and demand. Secondly, considering the externalities of environmental pollution, this paper calculates the cost of resource depletion and environmental management based on the cost method and establishes the model of resource compensation based on the value equivalence principle and puts forward the ladder type compensation mechanism model between different partitions. Then, against that fossil energy reversely inhibition taxes, mainly including resources taxes and environmental taxes, this paper uses the method of scenario analysis to establish green tax mechanism. Finally, as a goal of social benefit maximization, this paper researches coordinative policy mechanism based on CGE model to promote the renewable energy consumption and promote China s renewable energy clean and sustainable development. 1 Introduction With the increasing deterioration of the ecological environment, the development of renewable energy has become a central issue. In recent years, the installed renewable power capacity in China has increased rapidly due to its large scale and centralization. The high penetration of renewable power has brought about a series of problems such as the renewable energy utilization and curtailment, auxiliary services and the pricing mechanism. According to the National Energy Administration statistics, in the first half of 2015, the national total solar power generation is 19TWh, and the quantity of solar curtailment is about 1.8TWh, especially in Gansu, in which the quantity of solar curtailment is about 1.14TWh, and the rate of solar curtailment has reached up to 28%. China s wind power consumption is 97.7TWh, the wind curtailment generation is 17.5TWh, and the average rate of wind curtailment is 15.2%, which increased by 6.8% compared with the first half of Jilin province is the most serious area in China, and the rate of wind curtailment has reached up to 42.96%,nearly the half in the first half of The Southwest of China is abundant with hydropower; however, the area has the most serious problem about hydropower consumption. The hydropower curtailment reaches 4.8TWh and 17.3TWh respectively in Yunnan province in 2013 and According to Yunnan Energy

2 Administration prediction, the hydropower curtailment will reach 14.3TWh, 7.4TWh, 7.1TWh, 17.6TWh in Yunnan province during the year of 2017~2020. With such a severe case of renewable energy consumptive and downside economic, promoting renewable energy consumption has become China s urgent needs. Domestic and foreign scholars have conducted extensive research about renewable energy consumptive. K. Hacatoglu, et al (2015), Adriana Diaz Arias (2013) studied the relationship of economic structure and energy efficiency. In terms of renewable energy price, Saeed Moshiri (2015), Yongxiu He, et al (2015) studied the relationship of energy price and consumption, feed-in tariff to promote the renewable consumptive. In order to establish scientific and reasonable subsidies, the relationship of subsidy mechanism, energy technologies, energy structure and energy efficiency has been studied widely by Li Hong(2013), Gert Janssens, et al (2014), Adriana Diaz Arias, et al (2013), Seyed Reza Mirnezami (2014).On tax policies, Camille Gonseth, et al (2015), Sonia Vera, et al (2015), studied that taxes which are used to suppressing fossil fuel industry development are the focus of considerable social concern. Many papers have analyzed the impact of tax policy on renewable energy. In the combination of energy policy, the optimization between price and investment, tax and subsidies, have been discussed to promote the sustainable development of energy by Yongxiu He, et al (2015). However, the researches, which take renewable energy consumptive as corn, are less. Meanwhile, Facing with increasingly serious problems about renewable energy consumption in China, therefore, cooperative policy mechanism to promote renewable energy consumption among prices, subsidies and tax has essential practical sense. This paper takes Several opinions about further deepening the reform of electric power system (Zhong Fa 2015 No.9 ) as the guiding ideology, establish the prices, subsidies and tax models of renewable energy respectively, uses CGE model to study the cooperative relationship among prices, subsidies and tax policies, in order to promote renewable energy consumption and the development of China's economy. 2 CONSTRUCTIONS OF CGE MODEL AND DATA HANDLING 2.1 Construction of CGE model CGE model is also called computable general equilibrium model describes the economic structure inner relationship between Microeconomic and macroeconomic, to analyze the development of economic from different angles. The model is composed of seven parts, namely the production module, the price module, the income module, the trade module, the tax module, the equilibrium constraint and the dynamic module. 2.2 Data handling According to the input-output table of China in 2010, this paper uses RAS method to make the corresponding adjustment, and finally gets the macro SAM table in 2013.In order to get suitable parameters of CGE Model, the extensive literature of other scholars have been studied, and the parameters are set by Guozhengquan, et al (2015). 3 METHODOLOGIES

3 3.1 Tax model According to the link and purpose, the tax model consists of the resources tax and environment tax. Resource tax Resource tax is levied on fossil energy supply link, and it s purpose is to limit the exploitation and supply of fossil fuels. Figure1:Resource tax schematic diagram sales income In the mining sectors, resource tax is determined based on mining quantity. In the consumption process, resource tax is determined based on the imbalance of product of income and tax rate between different sales. exploit mining sectors access to markets A B C D Consumption link The end of consumption In this tax, taxpayers are required to pay for mining sectors and consumption link. The formula is calculated as follows. R =AQ ( R R ) (1) tax i m m n n where R is the income of resource tax, is the tax rate which is levied according to quantity, tax A Q i is the quantity of the ith energy, i represents energy including coal, oil and gas, m R, Rn is sale income of m, n retailer respectively, m, n is the tax rate of m, n retailer respectively which is levied according to price. Owing to the existence of tax favored policy, the same. m, n may not be Environment tax

4 Owing to the main air pollution in China is carbon dioxide and sulfur dioxide, so those are levied environmental tax. The environment tax is mainly aimed at the resources consumption link, it s target is to reduce the consumption of fossil fuels, and to control CO 2, SO 2 emissions. Firstly, the rate of carbon and sulfur of different fossil fuels, the conversion coefficient from carbon to carbon dioxide and sulfur to sulfur dioxide, fossil fuels consumption are combined by multiplication correspondingly. And the carbon dioxide and sulfur dioxide emissions are got. Secondly, environment tax is the sum of environment tax of carbon dioxide and sulfur dioxide, which are got by multiplication of emissions and environment tax rate correspondingly. The formula is calculated as follows. Retax [ B1 ( Qi i) 1 B2 ( Qi i) 2] (2) i where Retax is the income of environment tax, B1 is rate of carbon dioxide which is levied according to carbon dioxide emissions, Qi is the quantity of ith energy, i represents energy including coal, oil and gas, i is the rate of carbon of ith energy, B2 is rate of sulfur dioxide which is levied according to sulfur dioxide emissions, i is the rate of sulfur of ith energy, 1 is conversion coefficient from carbon to carbon dioxide which is 3.67, 2 is conversion coefficient from sulfur to sulfur dioxide which is Subsidy model The subsidy model for renewable energy is designed in this section according to environment and resource depletion cost, its specific subsidies mechanism as shown in figure 2. Figure 2: Renewable energy subsidy mechanism considering environment and resource depletion cost Renewable energy subsidy mechanism Environment cost resource depletion cost governance environment cost Health cost governance environment cost of carbon dioxide governance environment cost of sulfur dioxide governance environment cost of nitrogen oxide compound Illness cost Death loss Environment Cost

5 I. Governance environment cost Combined with China s current development stage, there are mainly carbon dioxide, sulfur dioxide and nitrogen oxides in the air. According to the environmental contribution rate of the renewable energy, the calculation formula of the environmental governance cost is as follows: where n (3) C a q g λ λ =1 Cg is the unit cost of environmental governance, aλ is unit governance costs of, qλ emission reduction of CO2, SO 2, NO X. level of its development. of unit renewable energy, represents air pollution including is adjustment factor, which is determined by the government according to the is II. Health cost Health cost refers to the use of renewable energy sources to bring people s health, which mainly includes the disease medical expenses of per renewable energy and death losses of per renewable energy. The disease medical expense of per renewable energy is got by treatment cost, which was caused by air pollution, divided renewable energy quantity. C P H(1 ) q eo 1 (4) where C1 is the cost of illness of per renewable energy, Peo is the sum of the number of sick and dead caused by environment pollution, H is the average cost of treatment per capita, is the rate of death, q is quantity of renewable energy. Death losses of per renewable energy is got by death losses, which was caused by air pollution, divided renewable energy quantity. And the death losses are related to per capita disposable income freely and death toll. C P HC q eo 2 (5) HC R(1 ) n n (6) n i=1 (1 r) where C2 is the loss of death per renewable energy, HC is the average human capital, R is per capita disposable income freely, is the rate of increase of the annual per capita disposable income freely, n is shortened lifespan caused by environment pollution, r is discount rate.

6 Table 1:macro SAM table in 2013 unit: million Yuan Account Activity Commodity Labor Capital Resident Enterprise Government Foreign Investment Inventory changes Total Activity Commodity Labor Capital Resident Enterprise Government Foreign Investment Inventory changes Total Table 2:The theoretical payoff matrix main body The highest price Suppliers The lowest price demanders Purchase renewable energy Not purchase renewable energy ( PQ bq C, PQ PQ) ( PQ 0 d bq 1 d Cd, PQ e e PQ i i) 0 d 1 d d i i e e 1 d, i e e k1 b1 B Qd C PQi PQ k 1 b B Q C, PQ PQ 1 1 d d e e i i

7 Health cost is the sum of the cost of illness of per renewable energy and the loss of death of per renewable energy. The formula is calculated as follows. Ch C1 C2 (7) where Ch is health cost, C1 is the cost of illness of per renewable energy, C2 is the loss of death of per renewable energy. Owing to the environmental cost consisted of governance environment cost and health cost, combined formula(4)to(7), the environment cost is shown as follows. Ce Cg Ch (8) where Ce is environment cost, Cg is the governance environment cost, Ch is the health cost. Resource Depletion Cost Using renewable energy sources widely can reduce the consumption of fossil energy consumption, so this paper uses user cost method to account resource depletion cost. R D (1 r) T (9) where D is resource depletion cost, r is discount rate, R is the annual net profit of the exploitation of fossil energy, T is effective mining years of fossil energy. In summary, the total subsidies for renewable energy sources are calculated as follows. C Ce D (10) where C is the total subsidy for unit renewable energy, e C is the environment cost, D is resource depletion cost. 3.3 Price model This model uses game theory which involves the participation of electricity suppliers and the demanders then analyze the direct deal between the supply and demand sides. During the initial stages of power system market, because of the oversupply of renewable energy, it can be accepted the electricity prices that could maintain a litter profit or compensate for the cost of electricity by electricity suppliers, but the demanders can get benefits by using renewable energy compared with the use of fossil energy. According to these principles, electricity suppliers can choose the price between the highest price and the lowest price, and the highest price P 0 (including subsidy) should been set by government. Adopting the behavior s main reason is the competition mechanism is not perfect in the early stage of

8 market, and the major renewable energy suppliers might monopolize the market and weaken the competition in electricity market; the lowest price of renewable energy is set using the marginal cost plus profit method to guarantee cost-recovery by suppliers respectively. In this paper, its marginal cost is b 1, its variable cost coefficient is k, then its lowest price is kb 1.In summary, the price of renewable energy is kb P. The theoretical payoff matrix is shown as Table 2. 1, 0 In order to promote renewable energy consumption, With the condition of ensuring adequate energy, the power supply side quotes renewable energy price based on cost; The demanders take the maximize economic profit as the most principle. According to the static game theory, renewable energy prices need to meet the following requirements as formula (11). PQ i i PQ e e 0 Pd P0 (1 ) ( k1b 1 B) Qd Ad Qc Ac (11) where P e, Qe are the market price, quantity of eth energy, e represents renewable energy P i, Q i, are the market price, quantity of ith energy, the unit subsidy, is the highest price weighting in the price, e i represents energy including coal, oil and gas, B is A is energy released by unit eth energy, Ai is energy released by unit ith energy. 4 Scenario analysis by CGE model 4.1 Environment tax of carbon dioxide policy The study assumed that the environment tax of carbon dioxide namely carbon tax is 10 Yuan per ton, 15 Yuan per ton, 20 Yuan per ton, 25 Yuan per ton, 30 Yuan per ton, 40 Yuan per ton, 50 Yuan per ton and 60 Yuan per ton respectively. The simulation results are shown in figure 3~7. Figure 3:The change of GDP with carbon tax policy 0.0% -0.2% The rate of carbon -0.4% -0.6% -0.8% -1.0% -1.2%

9 Figure 4:Environmental benefit with carbon tax policy Figure 5: Energy structure with carbon tax policy 0.0% -0.5% -1.0% -1.5% -2.0% -2.5% -3.0% -3.5% The rate of carbon tax 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% The rate of carbon tax Yuan/t The change rate of carbon dioxide The change rate of sulfur dioxide The change rate of nitrogen oxide compound Fossil energy thermal power generation renewable energy Figure 6 The degree of substitution of electric power to fossil fuels with carbon tax policy 12% 10% 8% 6% 4% 2% Figure 7 The degree of substitution of renewable energy to fossil fuels with carbon tax policy 12% 10% 8% 6% 4% 2% 0% The rate of carbon tax Yuan/t Seen from Figure 3~7, firstly, compared with no carbon tax, carbon tax make the economy down, however, it helps to reduce environmental pollutants, adjust energy structure and promote energy alternative and clean alternative. Secondly, with the increase of the carbon tax rate, the emissions of carbon dioxide, sulfur dioxide and nitrogen oxides gradually reduce, the consumptions of renewable energy gradually increase, and the ability that electricity power and renewable energy instead of fossil fuels gradually increases. To sum up, based on fully considering China's carbon tax policy which is not implemented, affordability and social stability of China, 10 Yuan per ton's carbon tax rate is beneficial to gradually promote the carbon tax policy to maturity, adjust China's energy structure and promote the consumption of renewable energy. 0% The rate of carbon tax Yuan/t 4.2 The comprehensive simulation analysis of environment tax of

10 carbon dioxide policy and subsidy policy Based on the subsidy model, combined with the relevant data of China in 2013, the amount of subsidy is Yuan /kwh. The scenarios are designed as shown in Table 3. Table 3:Comprehensive scenarios of carbon tax policy and subsidy policy A Base Scenario I II III Scenario VI VII VIII IV (V) The rate of carbon tax 10 Yuan/t The change rate of subsidy -30% -20% -10% 0 10% 20% 30% subsidy (Yuan/kWh) Note: The unit subsidy is the environmental cost in A scenario (IV); The unit subsidy is the environmental cost plus resource depletion cost in base scenario. According to the above scenario, the simulation results are shown as follows: Table 4: Subsidy elasticity of different comprehensive scenarios with carbon tax policy and subsidy policy scenario II III IV V VI VII VIII The change rate of GDP (%)(1) The change rate of unit subsidy(%) (2) Subsidy elasticity(%)( 1)/(2) Figure 8 The change rate of GDP with carbon tax policy and subsidy policy Figure 9 The change rate of energy consumption with carbon tax policy and subsidy policy 0.10% 0.08% 0.06% 0.04% 0.18% 0.13% 0.08% 0.02% 0.03% 0.00% -0.02% -30% -20% -10% A 0% 10% 20% 30% -0.02% -30% -20% -10% A 0% 10% 20% 30% -0.04% -0.07% -0.06% -0.08% Fossil energy Wind power hydropower solar power

11 From the above simulation results, firstly the table 3 shows that the relationship between the subsidy policy and the economic development is positive and the subsidy elasticity is gradually reduced. Then, in the implementation of the comprehensive policy of carbon tax and subsidy, it can be concluded that with the increase of unit subsidy, GDP gradually increased, especially when the amount of per electricity subsidy exceeds environmental costs (i.e. the A point) in figure 8. The positive effect of subsidy policies to stimulate GDP growth has exceeded the economic negative effect caused by the carbon tax. Combined with Figure 9, with the increase of the amount of unit subsidy, hydropower, wind power and solar power generation consumption gradually increase, while fossil energy consumption presents negative growth trend. Therefore, the coordination mechanism which levies high carbon tax and sets high subsidy at the same time can promote renewable energy consumption, based on the stability of social economy. However, because the subsidy elasticity is gradually reduced, the maximum amount of unit subsidy cannot exceed the environment cost of renewable energy, namely the scene IV (A) 0.24 Yuan/kWh in scenario IV (A). 4.3 The comprehensive simulation analysis of environment tax of carbon dioxide policy, subsidy policy and price policy The paper analyzes the comprehensive policy of environment tax of carbon dioxide policy, subsidy policy and price policy, and takes wind power as an example in one province. The specific scenarios are shown in table 5. Table 5: Comprehensive scenarios of carbon tax policy, subsidy policy and price policy. scenario I II III IV V VI VII VIII IX The rate of carbon tax 10 Yuan/t Unit subsidy 0.24 Yuan/kWh k According to the above scenario, the simulation results are shown as follows: Figure 10 The change rate of GDP with carbon tax policy,subsidy policy and price policy Figure 11 The change rate of energy with carbon tax policy,subsidy policy and price policy -0.18% -0.19% -0.20% -0.21% -0.22% -0.23% -0.24% -0.25% % 0.40% 0.30% 0.20% 0.10% 0.00% -0.10% the change rate of fossil energy the change rate of wind power k Combined with the above simulation results, with the increase of K, the price level of wind power is

12 increasing. First of all, according to figure 10, when the carbon tax and subsidy remain unchanged, the wind power price is higher, the rate of GDP falls more. Secondly, according to figure 11, when the carbon tax and subsidy remain unchanged, and when k changes from 1 to 5, namely the wind power price increases, the amount of wind power consumptive gradually decreases, and fossil energy presents negative growth trend. Therefore, in order to promote renewable energy consumption, the renewable energy market price should gradually reduce. Although the lower price of wind power is benefited to the stable of social economy, however, the minimum price should be marginal cost of unit subsidy to achieve sustainable development. 5 CONCLUSIONS Through the above research, the conclusions of this paper are as follows. First, because the distribution of natural resources in China is not balanced, the Northwest region has adequate rich wind and solar power, while the Southwest region has adequate hydropower. Owing to hydropower has the double attributes of renewable and clean, so hydropower can be drew into Renewable Portfolio Standard, in order to promote the development of renewable energy in China. Second, in order to solve the problem of wind abandoned and light abandoned and better promote renewable energy consumptive, we need to maintain the coordination of energy price, tax and subsidy policy in consideration of the balance of market supply and demand. In the mechanism of promoting renewable energy consumptive policy coordination, price policy should not only answer to changes in the cost of renewable energy sources, but also combine with the market expected and considering the actions of competitors. Subsidy policies need to reflect the external revenue of renewable energy resources and environment. Tax policy needs to reflect the fossil energy scarcity and environmental damage cost. Third, in order to promote the renewable energy consumptive, we need price, subsidies and tax policies conform to the requirements of different stages of development in the process of the gradual marketization of the power industry. In the price policy, the change of the external environment is considered in the process of the market price. In the subsidy policy, government needs to consider the changes of resources, environment and technology, and realize the dynamic change of subsidies. In the tax policy, we should achieve the mutual cooperation between the reverse inhibitions in the different stages of development. Fourth, in order to remain the social and economic stable, a good synergy of tax, subsidy and price policies is needed to promote renewable energy consumption. Levying carbon tax will bring negative effect to economy development. The subsidy policy can promote economy development, but the unit subsidy cannot exceed environment cost of renewable energy. Price policy is a neutral policy, when the market price is high, it is not conducive to the development of renewable energy and economy, on the other hand, when the market price is high, it is not conducive to the development of renewable energy and economy, when the market price is low, it is conducive to the development of renewable energy and economy. So cooperative policy mechanism of tax, subsidy and price policies can promote renewable energy consumption, at the same time, maintain stability of economy, achieve the effect of energy-saving emission reduction, and then promote the construction of sustainable energy source system.

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