Multi-Pollutant Abatement and Policy Interactions: CO 2 and NOx Emissions in Sweden

Transcription

1 Multi-Pollutant Abatement and Policy Interactions: CO 2 and NOx Emissions in Sweden Motivation Environmental policies have to deal with a complex industrial reality where a number of pollutants are important. For combustion processes this is a well-established problem and we have for instance both climate and acidification problems in addition to a number of other local pollutants. Over the last decades countries like Sweden have been developing more and more sophisticated policy instruments to deal with CO2, NOx and SOx just to mention some of the most obvious. In this project we are focusing on the interaction between policies and their effect on the trade-offs that companies face between different types of abatement. If a production process is accompanied by the emissions of several pollutants, the implementation of an environmental policy aimed to reduce one pollutant might create spillovers if it leads to decreased or increased emissions of other pollutants. These spillovers arise since firms change or modify production processes in response to the policy. In the case of climate change, for example, a common strategy to reduce CO 2 emissions is switching the fuel mix from fuel oil towards an increased use of bio-fuels. Though this strategy is helpful in reducing CO2 emissions, it tends to increase emissions of nitrogen oxides (NOx), particulate matter (PM), carbon monoxide (CO) and VOC. In turn, this means higher risk on human health, for the population exposed to these pollutants (Leightner 1999, Syri et al. 2001, Brännlund and Kristöm 2001 and Proost and Van Regemorter 2003). Policy spillovers and policy interactions have important implications for policy design and cost-benefit analysis. The aim of this project is to examine empirically to what extent climate change policies affect the effectiveness of policies to reduce air pollution. For this purpose, we analyze the case of Sweden, testing for climate change spillovers in power generation and the aggregate effects of the interaction between the European Union Emissions Trading System (EU ETS) and the Swedish Charge on nitrogen oxides. Background Since Sweden has ecosystems that are naturally very sensitive to acidification, this nation has a very determined policy on the precursors to acid rain, notably SO2 and NOx. For NOx, a refundable charge was implemented in 1992 with the aim of reducing NOx levels by 30% by 1995 compared with 1980 levels (Sterner and Turnheim 2009). The charge applies to NOx emissions from electricity and heat-producing boilers, stationary combustion engines and gas turbines with a useful energy production of at least 25 gigawatt hours (GWh) per year. The charge is approximately Euro 5,3 per kilogram NOx. The total charge amount is returned to the participating plants in proportion to their production of useful energy. Hence, the system encourages targeted plants to reduce NOx emissions per unit of energy to the largest possible extent, since plants with lower emissions relative to energy output are net receivers. The refund varies from year to year, but in recent years it has been just under $1 per megawatt hour (MWh) of useful energy while the average emissions factor has been 0.25 kilograms NOx per MWh. When it comes to CO2 emissions, Sweden introduced a specific uniform CO2 tax in Over the years, Sweden has significantly increased the CO2 tax rates, in order to take account of the need to fight climate change. At present, the general CO2 tax rate corresponds to approximately 98,1 euro/tonne. In order to strike a balance between fulfilling environmental objectives and securing the competitiveness of certain sectors being subject to international competition, the industry has generally faced a considerably lower CO2 tax (approximately 21% of the general tax). Finally, since 2004, most of the installations subject to the charge on nitrogen oxides and CO2 tax are also part of the EU ETS: the largest emissions trading scheme in the world and the centre-piece in the EU efforts to reduce greenhouse gas emissions. Sweden took a first step towards abolishing the CO2

2 tax within the EU ETS on July 1, The CO2 tax paid by industry within the EU ETS now amounts to 15 % of the general tax level, to be compared to the 21 % tax level paid by industry outside the EU ETS. Fuel substitution seems to have played the most important role for reduction of carbon emissions in Sweden (Löfgren and Muller 2010). Fuel substitution must be explained by changes in fuel prices, as well as by changes in specific emission costs caused by policies. Though there is no doubt that the effects of reducing CO2 emissions are beneficial, the increased price of CO2 emissions (relatively to the price of NOx emissions) might have affected the capabilities of some firms to reduce NOx emissions. For instance, Table 1 displays information on the total emissions of NOx by installations subject to the NOx charge, distinguishing between those firms in the EU ETS (thus paying the CO2 tax as well as the price of the EU ETS allowances) and those that are not (and thus, paying only the CO2 tax). As described in the Table, during the period , the former group reduced their NOx emissions by approximately 8,69% (from 0,230 to 0,210 kg NOX/MWh useful energy). Instead, those firms only paying the carbon tax reduced their emissions by approximately 14,4% (from 0,256 to 0,208 kg NOX/MWh useful energy). Characteristics Table 1: Total NOx emissions by installations subject to the NOx charge NOX - EU ETS Only NOX Total Total Nox Emissions (tonnes) Useful Energy (GWh) Nr. Installations per year Nr. Boilers per year Nr. Boilers per installation 1,6 1,7 1,2 1,2 1,4 1,4 kg NOX/MWh useful energy 0,230 0,210 0,256 0,208 0,243 0,209 tonnes NOX/boiler per year 39,2 35,3 29,5 23,6 34,3 29,4 Objectives Through this project we aim to identify the effects of the interaction of NOx and CO2 policies on the patterns of fuel input substitution of Swedish firms during the period though: 1) An analysis of the intensity in the use of different fuels during the period Through this approach, our focus is to analyze the effects of fuel prices and emissions prices on the relative use of different fuels within the fuel mix. For this purpose, we plan to use firm-level data on the fuel mixes of boilers in several industrial sectors. This information will allow us to perform econometric analyses of fuel price elasticities and to estimate the effect of changes on the stringency of CO2 policies on the patters of fuel substitution. We plan to simulate policy scenarios to quantify the effects of the interaction of CO2 and NOx policies in Sweden in terms of the aggregate emissions of both pollutants. 2) A production function approach The rate of changes in fuel mixes can be attributed to fuel prices, but also to specific features of the plants, as for instance, size, industry type, location and availability of abatement technologies (for example, flue gas treatment technology (SCR and SNCR 1 in the case of NOX). To take account of 1 Selective catalytic reduction (SCR) and selective non-catalytic reduction (SNCR)

3 these factors, we plant to estimate a production function, where the production of energy is written as a function of the emissions of several pollutants, labor, capital and the state of the technology. Here, our focus is to estimate the marginal rate of technical substitution and elasticity of substitution between CO2 and NOX. The advantage of this approach is that NOX and CO2 emissions may be treated as inputs based on the direct relationship between emissions and output. Leightner (1999) has also treated emissions in the same way but using linear programming to estimate the isoquants of SO2/NOX in the Thailand s electricity sector. The marginal rate of technical substitution between NOX and CO2 emissions may be obtained directly from the isoquants, telling us how much an increase in NOX emissions generates a decrease (or increase) in CO2 emissions for a certain level of energy production. Moreover emissions are expected to reflect also the fuel mix used. Note that the data requirements in each case are slightly different. The former approach requires individual information on emission prices (i.e. the carbon tax is specific to the fuel mix used by each firm) as well as information on fuel prices. The latter approach only requires data on output and input quantities. The production function approach has been widely applied in the economic literature for several purposes and has also been studied from the estimation perspective (Chambers, 1993; Wooldridge, 2009). We have access to a panel-data set that includes all the variables in the Swedish NOX program during the period However, we will focus on the period to take account of the overlap between the CO2 tax and EU ETS. The data set includes production levels of energy, the relative consumption of fuels used in production, installed effect (capital), and the location of the plant. We will combine such dataset with the EU ETS system of monitoring and reporting, as well as the EU ETS allowances prices. A variety of specifications in the production function may be implemented. However as our objective is to allow as much flexibility as possible, in the estimation to identify substitutability or complementarity between NOx and CO2 emissions we must go farther than Cobb-Douglas form. Constant Elasticity of Substitution (CES), translogarithmic and other specifications will be explored. No previous study using Swedish data exist concerning fuel substitution and the trade-offs between NOx and CO2 emissions. Brännlund and Ludgren (2004) studied the fuel input substitution of Swedish heating plants under CO2 taxation and a subsidy for wood fuel production. With regards to this study, our approach is broader as it considers several industrial sectors and the interaction between several policies and pollutants. Combining the information gathered through both approaches we could develop some suggestions regarding the need for integrated pollution policies for combustion processes. Reporting and Scientific Outcomes We plan to deliver a report to Göteborgs Forskningsstiftelse describing the main finding of this study as well as policy implications. We are particularly interested in a close dialogue with Göteborg Energi since the exact implementation of all the taxes and regulations concerning energy and combustion have now become so complex that their true meaning requires such a dialogue with practioners. In addition, we plan to present the results in the next conference of the International Association of Energy Economics as well as submitting a scientific paper to a well known journal (such as the Journal of Environmental Economics and Management) in the area of energy economics. Project Team The project team includes Professor Thomas Sterner (project-leader), Researcher Jessica Coria and PhD student Jorge Bonilla.

4 Professor Thomas Sterner has for many years developed the field of policy instrument design and selection and written various books as well as one standard textbook on this subject (Sterner, 2003). He has also been active as a researcher concerning both climate change and the management of various ecosystems (mainly fisheries in Sweden and some agriculture in Africa). In the area of climate change, Sterner has done work on discounting, policy instrument design permits and taxes both in industrial and transport sectors. Jessica Coria is a post doc research fellow at the Environmental Economic Unit, University of Gothenburg. Her work lies on the effects of the choice of market- based policy instruments on the rate of adoption of environmentally friendly technologies and compliance with environmental regulations, the effects of the interaction of single pollutant policies. She does both theory and applied work, although most of her work is within modeling of environmental regulation. PhD student Jorge Bonilla is particularly interested in the analysis of air pollution problems caused by emissions from mobile and point sources using applied econometrics. The analysis aims to assess effectiveness of the environmental policies, identify trade-offs and trends after the regulations. Timing Start: End: References Brännlund, R and Kriström, B "Too hot to handle? Benefits and costs of stimulating the use of biofuels in the Swedish heating sector. Resource and Energy Economics 23: Brännlund, R and Lundgren, T "A dynamic analysis of inter-fuel substitution for Swedish heating plants. Energy Economics 26(6): Burtraw, D., Krupnick, A., Palmer, K., Paul, A., Toman, M., Bloyd, C "Ancillary benefits of reduced air pollution in the U.S. from moderate greenhouse gas mitigation policies in the electricity sector". Journal of Environmental Economics and Management 45 (3): Chambers, R Production Economics. Ed. John Wiley. USA Leightner, J "Weather-induced changes in the tradeoff between SO2 and NOx at large power plants". Energy Economics 21: Löfgren, Å. and Muller, A Swedish CO2 Emissions An Application of Decomposition Analysis and Some Methodological Insights. Environmental and Resource Economics 47(2): Proost Stef and Van Regemorter, D. 2003: "Interaction between local air pollution and global warming and its policy implications for Belgium". International Journal of Global Environmental Issues 3 (3): Sterner,T. and Turnheim, B Innovation and diffusion of Environmental Technology: Industrial NOX abatement in Sweden under Refunded Emission Payments. Ecological Economics 68(12):

5 Syri, S., Amann, M., Capros, P., Mantzos, L., Cofala, J. and Klimont, Z. 2001: "Low -CO2 energy pathways and regional air pollution in Europe". Energy Policy: Wooldridge, J On estimating firm-level production functions using proxy variables to control for unobservables. Economics Letters 104(3):