NOx Abatement, REP Experience in Sweden Political Economy Comparison w Norway Interaction Climate policy Techn Innovation/Diffusion

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1 NOx Abatement, REP Experience in Sweden Political Economy Comparison w Norway Interaction Climate policy Techn Innovation/Diffusion SEPA June 2013 T Sterner, J Coria Thomas Sterner

2 Swedish Acid Policy Sweden (+Norway...) most affected Sensitivity of ecosystems extreme Highest Sulfur taxes in the World AMBITIOUS NOX POLICTY TOO

3 Technicalities of NOx Not like SOx, NOx hard to estimate. Formed by N 2 and O 2 in air. Reaction nonlinear in T which varies in furnace.

4 Abatement of Nox Humidity EGR Air flow & Temp Fuel distribution Fuel Choice SCR, SNCR Ammonia

5 The role of measurement Engineers try measures Finetuning crucial Measurement necessary for plant engineers

6 REP mechani sm

7 REP Each company pays 5 /kg Money refunded to same industries Don t get back what you paid! Refund= output share in total fees like a tax: Tax has 4 effects: Techn./ Price/ Budgetary (and tax interaction)

8 Economics of REPs (comp. Tax) Pq i c i (q i, a i ) Te i (q i, a i ) + σ i T[ i e i (q i, a i )] q output, c prod cost, a abat. Te charge, σ share and σt e is the refund. c a = Te a (1 σ i ) P = c q + Te q (1 σ i ) T(E/Q)(1 σ i )

9 Conclusions Abat. Incentives same Average payment 0 --> no output effect nor revenue recycling effect. No effect on competitivity, targetting of subsectors easier. Inoptimal because marginal firms are not driven out of business However Acceptability higher --> Fee T higher

10 PROPERTIES OF REP Useful when output effect not wanted Small open economy Targetting of only some industries Compact lobby of powerful polluters Oiligopoly (se Requate and Gersbach)

11 Political Economy arguments Fredrikson & Sterner (Econ Letters) clean firms lobby for higher tax Lobby for lower taxes weakened

12 Kgs NOx / GWh Lower emission coefficients 0,45 0,4 0,35 0,3 0,25 0,2 0,15 0,1 0, Year average median 190

13 Some Conclusions Importance of Monitoring + High Price Signal Targetting of subsets of plants Refunding (or free permits). Sacrifice output and revenue effects but get abatement incentives & acceptability. Also dynamic effects on techn.

14 Synergies and Trade-offs between Climate and Local Air Pollution Policies in Sweden. Jorge Bonilla, Jessica Coria and Thomas Sterner University of Gothenburg

15 Introduction Multi-level climate governance and interactions with local air pollution governance. What is the combined effect of CO2 Tax, EU ETS and NOx REP on? Technical progress Substitution; CO2 and NOx. Shadow prices of CO2 and NOx.

16 Methodology We model pollution technology as a non-separable production process in which CO2, NOx and heat and power generation are treated as joint outputs. We compute: The elasticities of substitution between output and emissions and between pollutants. The relative shadow price of CO2/NOx. We assess if substitution and shadow prices changed between ( ) and ( ).

17 Conclusions In CHP generation CO2 and NOx are substitutes. Substitution increases after the introduction of the EU ETS due to technological development. CO2 is more sensitive to prices that NOx: to encourage a large reduction in NOx emissions, the charge must be increased to a much larger level than its current value. Need for policy coordination to avoid unintended effects of one policy over other policies

18 Emission Intensity (kg NOx/MWh) Emission histograms 1,8 1,6 1,4 1,2 1 0,8 0,6 0,4 0, Cumulative Yearly Output (TWh/yr)

19 Innovation and Diffusion 0,8 0,7 0,6 0,5 0,4 0,3 0,2 0, Cumulative Yearly Output (TWh/yr)

20 kg NOx/MWh 0,18 Innov/Diffusion 0,16 0,14 0,12 0,1 Intercept Slope*10^7 0,08 0,06 0,04 0,

21 Individual plant behaviour e2005 (kg/mwh) 1,8 1,6 e 2005 = 1/2 x e 1992 e 2005 = 2/3 x e 1992 e 2005 = e ,4 1,2 1 0,8 0,6 0,4 worsening improvement e 2005 = 3/2 x e 1992 e 2005 = 2 x e 1992 e 2005 = 4 x e 1992 Series1 Series2 Series3 Series4 Series5 Series6 Series7 Linear )Series2( Linear )Series3( 0, ,2 0,4 0,6 0,8 1 1,2 1,4 1,6 1,8 e1992 (kg/mwh)

22 Number of NOx patents per million inhabitant Patents / Mcap AUST DENM FINL GERM JAPA SWIT SWED

23 Diffusion of NOx abatement technologies in Sweden Jorge Bonilla, Jessica Coria, Kristina Mohlin and Thomas Sterner University of Gothenburg

24 Introduction NOx emissions from large combustion plants in Sweden are regulated by the refunded charge and individual emission standards We study the effect of these policies on the propensity/timing of adoption of NOx abatement technology, Combustion, Post-Combustion and Energy efficiency improving technology.

25 Methodology Data: SEPA reports of boilers in the NOx charge system : Cox proportional hazard model Dependent Variable: Adoption of technologies Independent Variables: Net NOx charge, prior technological state, biofuel usage, entry effects, rank effects, and external and internal learning. Estimations for the whole sample, sectors, and counties with stringent and lax emission standards.

26 Conclusions Drivers of adoption vary across technologies. The net NOx charge does not seem to encourage adoption of combustion or flue gas condensation technologies. The net NOx charge does stimulate adoption of postcombustion technologies. Standards and the charge tend to be complementary: the net charge has a larger effect for those boilers with stringent standards.

27 Further Research We cannot fully control for the individual stringency of the standard nor the year of implementation. We cannot rule out the possibility that more stringent standards are the result of larger past reductions due to the charge. Further research is needed to disentangle the dynamics of plant regulations.

28 The Norwegian NOx Fund Gbg Protocol: Norway must reduce NOx Tax 2007: 16 NOK/kg NOx from Propulsion machinery > 750 kw, motors, boilers and turbines >10 MW flares on offshore installations. 1/ NO x Fund Firms in Fund TAX-exempt

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30 Norway s NO x Fund -11 NOK /kg NO x for offshore oil and gas industry - 4 NOK /kg NO x for other industries. Fund REFUNDS a share (75%) of NO x -reducing investments. SMALL TAX COMBINED WITH BIG SUBSIDY

31 Policy Options Tax versus Q Regulation MC = αa T H TAX REGUL E

32 If high tax needed then big tax revenues (good or bad?) MC = αa T H TAX REGUL E

33 A subsidy could also work MC = αa T H Subsidy REGUL E

34 But is expensive MC = αa T H Subsidy REGUL E

35 Combined Tax Subsidy MC = αa T H Subsidised MC = sαa T L A tax =ae= T/α A ref tax =ae=t/sα E

36 Fees used to finance subsidy MC = αa T H Subsidised MC = sαa T L A tax =ae= T/α A ref tax =ae=t/sα E

37 Output based Refunding (OB): p q c ( q ) A te ( q, A ) te. (1) i i i i i i i i i i i q i Q. (2) p q c ( q ) (1 s) A te ( q, A ) i i i i i i i i i, (8) problematic that s endogenous; (9) necessary for budget constraint: s te A, (9)

38 Thank you Extras; Distribution Admin costs

39 Distribution of net fees Waste combustion Food Chemical Pulp- and paper Energy

40 Administration REP: 0,5% r VerksamheProduktionsenhet NOX MWh FEE REFUND Net Fee Panntyp R 7 Kraft- och vpanna Brännare S 7 Kraft- och vpanna Brännare S 8 Massa- ochbarkpanna Roster 9 Massa- ochsmw Brännare 10 KemiindustHeater Brännare 10 KemiindustÅngpanna Brännare 11 KemiindustPanna Brännare 12 Kraft- och vhvp Roster S 12 Kraft- och vhvp CFB S 13 Avfallsförbr P CFB 13 Avfallsförbr P Avfallsförbr P Rörlig roste 19 Kraft- och vhvcb Brännare 32 Avfallsförbr P Rörlig rostes 32 Avfallsförbr P Rörlig rostes SUMS Refund: 9, SEK/MWh

41 NOx lbs/mwh Comparison em. Coeff Sweden/US Swedish NOx emission rates ,5 3 2,5 2 1,5 1 0,5 0 NB A possile correction factor would e 90/40 for en eff

42 NOX The Swedish retrofitted unit, in contrast, demonstrates that NO x levels well below the Swedish standard (and also below the German or United States standards) are achievable. The Swedish regulatory system, incorporating an economic incentive, clearly motivates [the Swedish plant] to achieve minimal NO x rates rather than just comply with the applicable emission standard. [p. 37].

43 Millock, K., C. Nauges and T. Sterner (2004), Environmental taxes: a comparison of French and Swedish experience from taxes on industrial air pollution, Journal of Institutional Comparisons. Fredriksson, P. G. and T. Sterner (2005), The Political Economy of Refunded Emission Payments, Economic Letters, Vol. 87, No.1, pp Sterner, T. and L. H. Isaksson (2006), Refunded Emission Payments -a hybrid instrument with some attractive properties, Ecological Economics, Vol. 57, No. 1, pp Sterner,T. B Turnheim, (2009), Innovation and diffusion of Environmental Technology: Industrial NOX abatement in Sweden under Refunded Emission Payments, Ecological Economics, Vol 68:12 (October) pp: Sterner, T. and L. H. Isaksson (2009), Innovation effects of the Swedish NOX charge, Consultancy Report for the OECD. Jorge Bonilla, Jessica Coria, Kristina Mohlin and Thomas Sterner, Diffusion of NOx abatement technologies in Sweden Jorge Bonilla, Jessica Coria, and Thomas Sterner, Climate and Local Air Pollution Policies in Sweden. Cathrine Hagem Bjart Holtmark T,Sterner, NOx fonden I Norge