Contingent Valuation Method and Carbon Tax in Mitigating CO2 Emissions from Road Transport Sector: A Literature Review

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1 Contingent Valuation Method and Carbon Tax in Mitigating CO2 Emissions from Road Transport Sector: A Literature Review Monika Gupta (Doctoral Student) Economics Area monika.gupta@iiml.ac.in Indian Institute of Management Lucknow

2 Introduction Agenda Carbon Tax as a Cost-effective Tool Research Gaps Models Development Contingent Valuation Method Decomposition Analysis Optimal Carbon Tax for Vehicle Emission and Scenario Analysis Future And Concluding Remarks 12/4/2014 Monika Gupta 2

3 Introduction 12/4/2014 Monika Gupta 3

4 Carbon Tax as a Costeffective Tool Future Research Problems And Conclusion Transport contributes around 13% in world s Green House Gas (GHG) emissions. Within transport sector, road transport has 73% share (IPCC, 2007) 95% of all world's transportation energy comes from petroleum based fuel (IPCC, 2007) Transport sector has big share around 4.8% in Indian GDP (MORTH, ) Responsible for about 10% of the total energy consumption (IEA, 2008) Huge consumption of fossil fuels by various vehicles leads to increase in GHG emissions and other pollutants 12/4/2014 Monika Gupta 4

5 Among the various measures to reduce fuel consumption carbon tax is the cost effective measure (Baumol and Oates, 1988; Mankiw, 2006) However, in a country like India, design and implementation of carbon tax on transport could be difficult, because of the diversity in population and their awareness about transport related problems 12/4/2014 Monika Gupta 5

6 Additionally researchers such as Stern (2007), Metcalf (2007), Shapiro (2007) and Nordhaus (2008) advocate steeper carbon pricing policies to avoid generating irreversible"tipping points" in the climate system For emission reduction in transport sector, tax is primarily levied either as fuel tax on the fuel price (UK, Japan, Norway, Costa Rica) or at the time of diesel and gasoline vehicle purchase (South Africa, Ireland) 12/4/2014 Monika Gupta 6

7 Before adopting any monetary measure it is important to know people s WTP for effective implementation of any policy measure, especially in case of carbon tax WTP can be derived through contingent valuation method (CVM) which is very popular in literature (Holvad, 1999; Berrens et al., 2004; Guo et al., 2007; Dubourg et al., 1997) 12/4/2014 Monika Gupta 7

8 Author Summary Country of study Carlsson and This paper quantifies individual willingness-to-pay measures of improved air Johansson- quality in 1996 by using the CVM. They found that WTP was increasing with Stenman(2000) income, wealth, and education. It is higher for men, members of environmental organization, people who own their houses and live in big cities. Belhaj (2003) This paper deals with the estimation of WTP for 50 per cent reduction of air pollution caused by road traffic. It presents the evidence that people of Morocco are interested in reducing air pollution problem. Further, social and economic variables are found to be critical in determining WTP. Sweden Rabat-Salé (Morocco) 12/4/2014 Monika Gupta 8

9 Author Summary Country of study Xieet al. (2004) TheyinvestigatethathowCVMcanbeusedtodesignchargeandcompensation polices for phasing out polluting vehicles. WTP for staying on the road and minimum WTA (willingness to accept) compensation for staying off the street are also estimated. Econometric analysis shows that household income, fuel costs,useofmotorcyclesorpublictransitaffectthevalueofwtpandwta. Bangkok, Thailand Voltaire et al. (2013) This study dealt with preference uncertainty in contingent willingness to pay for a nature protection programme. If a respondent is certain about his/her WTP thenhe/shewillpickasinglevalueforwtpotherwisehe/shewillgoforinterval values. Gulf of Morbihan (France) 12/4/2014 Monika Gupta 9

10 Carbon Tax as a Cost-effective Tool 12/4/2014 Monika Gupta 10

11 To correct the negative externality, Arthur C. Pigou suggested a monetary measure and pricing instrument i.e., a carbon tax Itworksontheprincipleof thepolluterpays Many economists agree that pollution taxes are the cost-effective way to reduce GHG emissions (Baumol and Oates, 1988; Mankiw, 2006; Sitglitz, 2006; Izzo, 2007) But to explore carbon taxes and support them environmental awareness is important (Oberhofer and Furst, 2012). 12/4/2014 Monika Gupta 11

12 The related literature broadly supports that any monetary value such as carbon tax works as an incentive towards environmental friendly behaviour (Michaelis and Davidson, 1996; Schipper et al., 1997) Loureiro et al. (2013) demonstrate the importance of public attitudes in the acceptability (and thus effectiveness) of policies designed to reduce GHG emissions from transport 12/4/2014 Monika Gupta 12

13 Brouwer et al. (2008)show that free riders problem has a negative influence on passenger s willingness to participate in voluntary offset schemes and suggest compulsory climate change tax. The study confirms that passenger s willingness topay(wtp)ishighlyinfluencedbytheeffectivenessofthetax Hsu et al. (2008) explained that people resist any green tax because of the suspicion that government will not use tax revenue rationally Carbon taxes can be designed as revenue neutral; in this way it will help to improve in total welfare regardless of environmental gain (Srivastava and Rao, 2010) 12/4/2014 Monika Gupta 13

14 Fuel tax has proved useful in influencing fuel demand and associated CO 2 emissionsinmanycountries (Sterner,2007) Researcher suggested different tax rates for transport sector Nordhaus (2008) estimated total social cost or discounted damages from driving miles was found $30 assuming that cost of 1 ton ofcarbonis$30 Fisher-Vanden et al. (1997), Zhao et al. (2012), Tol (2012) suggested different carbon tax rates for India 12/4/2014 Monika Gupta 14

15 Barkeretal. (2008)assess Thefeasibilityofa50%reductioninCO 2 emissionsby2050 To achieve this target, policy is to rise carbon price to $100/tCO 2 by 2050, whichcanbeattainedthroughco 2 permitsandcarbontaxes Chatterjee et al. (2007) Annual pollution abatement cost for a passenger car complying with Euro III normsasrs7,190andrs6,624forandhrapradeshandhimachalpradesh Pollution abatement cost includes the cost of upgrading vehicular technology and improving fuel quality 12/4/2014 Monika Gupta 15

16 Research Gaps 12/4/2014 Monika Gupta 16

17 Few studies which specifically focus on transport related GHG emissions in India (Badami, 2005; Singh, 2006; Chatterjee et al., 2007; Bandyopadhyay and Thukral, 2010) Literature supports (Schipper et al., 1997; Loureiro et al., 2013) understanding of people s perception before adopting any policy measure because it varies from country to country,butitisnotinpracticeinindia To evaluating consumer preference for pricing environmental externalities CVM is broadly used (Holvad, 1999; Berrens et al., 2004; Guo et al., 2007), but it has not been explored in knowing people s perception for carbon tax in Indian transport 12/4/2014 Monika Gupta 17

18 Scope of fiscal economic instruments etc. in combating GHG emission. Because fiscal instrument helps to neutralize the regressive effect of tax through revenue recycling Literature supports the hypothesis of double dividend attained by revenue recycling (Xie et al., 2004;, Zhang and Baranzini, 2004; Patuelli et al., 2005; Bureau, 2011), but it has not been effectively used in India, it will help in more equal distributive effect of tax(srivastava and Rao, 2010) There is need to address the relationship between energy use for transport and behavioural variables like people s perception, awareness, willingness to pay etc. (Hsuetal.,2008) 12/4/2014 Monika Gupta 18

19 Model Development 12/4/2014 Monika Gupta 19

20 Contingent Valuation Method (CVM) An important and effective valuation technique to know people s preference in monetary terms Based on Hicksian measure of consumer surplus Tries to derive willingness to pay (WTP) to have benefit and willingness to accept(wta) to forego benefit 12/4/2014 Monika Gupta 20

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23 Different steps in CVM method Identification and description Questionnaire Sample frame Sampling technique Data collection 12/4/2014 Monika Gupta 23

24 Decomposition Analysis Decomposition Analysis : Log Mean Divisia Index approach (LMDI) (Ang andzhang,2000;ang,2005;luetal.,2007) Helps to quantify the contributions of the factors which significantly impactthechangeofco 2 emissions A weighted sum of relative changes because CO 2 emissions from energy consumption is related to several factors 12/4/2014 Monika Gupta 24

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29 Optimal Carbon Tax For Vehicle Emission And Scenario Analysis Carbon Tax Scenarios Scenarioisanintimationofrealityandawaytovisualizethefuture Helps to analyse the effects of implementation of carbon tax in India if it is introduced in transport sector To see the distributional effect 12/4/2014 Monika Gupta 29

30 Long-range Energy Alternative Planning System(LEAP) Broadly used (Pradhan et al., 2006; Cai et al., 2008) worldwide including India for energy and environmental policy analysis and climate change mitigation assessment An integrated modelling tool helps to facilitate modelling of polices under different scenarios in medium to long term 12/4/2014 Monika Gupta 30

31 Scenarioscanbebuiltonthebasisoffollowingcriterion Different carbon tax rates Back casting scenario planning (Hojer and Mattsson, 2000; Shiftan et al., 2003; Akerman and Hojer, 2006) TakingthemostimportantfactorinCO 2 emissions Scenario related to any other fiscal measure except tax Taking into account revenue recycling(counter of regressive effect) and Jevons effect 12/4/2014 Monika Gupta 31

32 Determining the Optimal Tax Rate CarbontaxissuggestedbyArthurC.Pigou (1920) Optimal tax rate should be equal to the marginal social cost of damages from an additional unit of emission based on Ramsey formula (1927) Marginal damages change with emissions, the tax rate needs to change as well Experiences also suggest that carbon tax rate should increase every year. Because with increased economic development people s capacity to afford environment damage will increase 12/4/2014 Monika Gupta 32

33 Different carbon tax rates in India Fisher-Vanden et al. (1997) developed three cases for different tax rates Case1-ataxof$40pertonofcarbonin1995whichrisessteadilyuntil2015 Case 2- $8 per ton in 2005 and rise quickly to $162 per ton by 2030 when carbon emission will not increasetwotimesthe1990levelfortheperiod1995to2015. Case 3- when carbon emission will not increase three times the 1990 level for the same period, no tax raterequiresuntil2020,butatthistimea$2pertontaxrateisrequiredtostabilizecarbonemissionsas per the required level Zhao et al. (2012)proposed three carbon tax $14.02/tCO 2, $40.65/tCO 2, and $77.92/tCO 2 inordertointernalizethesocialcostofco 2 emission Tol (2012)calculatedmaximumcarbontaxas$45/tCO 2 inshortrun 12/4/2014 Monika Gupta 33

34 Conclusion and Future 12/4/2014 Monika Gupta 34

35 Behavioural attributes including awareness and technological innovation are two most important aspects to reduce GHG emission from transport sector To design any monetary measure and policy framework, people s willingness topayisimportanttoknow Carbon tax is an effective instrument to reduce air pollution Butpeoplesupporttaxesonlywhentheygotensuredthatthetaxproceeding is actually helping in combating air pollution Therefore to ensure the transparency and accountability of the use of revenue collected from carbon tax, is important. Revenue recycling may be helpful in this context 12/4/2014 Monika Gupta 35

36 Future To gauge people s awareness, responsiveness and willingness to paytotheproblemofco 2 emissionsfromroadtransportsector To identify and decompose the factors responsible for changes in CO 2 emission from transport sector such as vehicle activity (PKm, travel behaviour), mode share, fuel intensity, emission intensity, vehicle ownership, economic growth, etc. 12/4/2014 Monika Gupta 36

37 To analyze fuel taxes as an important market mechanism for combatingco 2 emissionandtheirdistributionaleffects a) To determine and analyse optimal carbon tax rate for road transport in India b) To study CO 2 emissions reduction potential and mitigation opportunities in different scenarios In case of India, potential of congestion charges as carbon tax cab be explored 12/4/2014 Monika Gupta 37

38 Questions/ Suggestions/Feed back

39 Thank You

40 Carbon tax rates in different countries As against Indian carbon tax rate (Rupees 50 per ton of coal) in 2010, many countries have started levying carbon tax since early 1990s with comparatively high rate. Following table presents few examples of tax rates in different countries. Country Year Adopted Rate (in $ per ton of co2) Annual Revenue Denmark 1992 $9-$18 $560 million(1993) Finland 1990 $ / gjoule $314 million(1994) Netherlands 1990 $ /giga-joule $850 million(1995) Norway 1991 $15-$47 $900 million(1994) Sweden 1991 $27-55 $1.7 billion(fy93-4) Sources: Muller (1996); OECD (1996); Netherlands Ministry of Housing, Spatial Planning and Environment. 12/4/2014 Monika Gupta 40

41 Few Important Concepts/Definitions Terminology Definitions Used in the literature Rebound (2) effect (Jevons paradox) Revenue recycling/ double dividend Fee bates Efficiency improvements often backfire and lead to use of more resources. It Proost (2008), Wagner & Lee raises fuel efficiency, reduces per-mile fuel cost of driving and hence cause an (2012), Hymel et al.(2010) increase in vehicle usage because people s disposable income is constant; therefore, travel increase due to lower cost might partially offset the benefits. A combination of carrot and stick, i.e., the use of charges and compensation Xie et al. (2004), Zhang & together. It worked as an incentive to effectively reduce CO2 emission and Baranzini (2004), Bureau (2011), eliminate polluting vehicles. There should be a net economic benefit (double Patuelli et al.(2005) dividend). Revenue Recycling effectively change the distributional effect of fuel taxes which were regressive. Double Dividend depends on the balance between economic losses caused by the ecological taxes and the benefits accruing from the revenue recycling. An instrument of revenue recycling where a combination of fees and rebates Proost & Dender (2012), (taxes or subsidy) designed for revenue neutralization. It would help to balance Small (2007), Greene et al. (2005), Michaelis & Davidson thesocialeffectsofacarbontax. 12/4/2014 Monika Gupta (1996), Davis et al.(1995) 41

42 Few Important Concepts/Definitions Terminology Definitions Used in the literature (3) ASIF approach Essentially, transportation energy use is a function of total activity (A), mode share (S), fuel Schipper et al. (2000, 2009), intensity (I), and fuel type (F). These are the four basic components which drive transport Zegras(2007) energy consumption and GHG emission. This approach will help in decomposing the effect ofabovefactorsforchangesinco 2 emission. Avoid-shift- improve framework (1) Avoid unnecessary trips (reducing the distances driven or the number of trips taken),(2) Dalkmann and Brannigan shift to more sustainable transport modes (reducing emissions per passenger unit), and (3) (2007), Leather & Team improve performance in all modes(reducing emissions per kilometre driven per vehicle). (2009), Bandyopadhyay, and This framework is significant in determining the behavioural aspect for travel activity. Thukral (2010), Planning commission(2011) Back casting Scenarios are designed as images of future. In this approach, ideal images of the future Shiftan et al. (2003), Hojer approach are determined and then paths between current scenario and future idealized scenario are and Mattsson (2000), found. Back casting approach tries to get the answers of the question, how can a specific Akerman and Hojer(2006) target be met? It is to a great extent directed towards finding trend-breaks and possible alternative paradigms that might be necessary in order to achieve the target set. 12/4/2014 Monika Gupta 42