Applying Emission Tax and Emission Permit Schemes Controlling Greenhouse Gas Emissions in the Thai-Cement Industry: A Social Welfare Analysis

Transcription

1 Southeast Asan Journal of Economcs (), June 04: - Applyng Emsson Tax and Emsson Permt Schemes Controllng Greenhouse Gas Emssons n the Tha-Cement Industry: A Socal Welfare Analyss Yuvaluck Setboonsrung Abstract Ths paper ams to compare socal welfare as a result of applyng an emsson tax scheme and emsson permt schemes to see whch scheme provdes greater welfare to cement ndustry n Thaland. The goal s to meet a greenhouse gas emsson reducton target. The method of the study conssts of three steps ncludng, ) settng scenaros of emsson taxes and emsson permts n four dfferent scenaros, ) applyng the Stackelberg model to a partal equlbrum theoretcal analyss for the olgopoly cement market, 3) conductng numercal analyss to a socal welfare functon by usng avalable data from the Tha cement ndustry. The results of the study show that the net socal welfare va the emsson permt approach s the best scenaro n promotng the follower frms to voluntarty nvest n emsson reducton projects and allows them to sell the rght to emt to the leader frm. These results also show ncorporatng an emsson tax approach and emsson permt regulaton to both the leader and the follower frms provde the lowest net socal welfare. The results of ths study could be used as a case study for the domestc greenhouse gas control n the sector where the market structure s an olgopoly. In addton, t could provde relevant nformaton for the Tha government to prepare a compulsory greenhouse gas reducton polcy n the future consderng socal welfare. Keywords: Emsson Tax, Emsson Permt, Socal Welfare, Cement Industry Lecturer, Department of Economcs, Faculty of Economcs, Kasetsart Unversty 50 Ngamwongwan Road, Chatuchak, Bangkok, 0900 Thaland. E-mal: fecoyls@ku.ac.th

2 Southeast Asan Journal of Economcs (), June 04. Introducton It s known that the growth of greenhouse gas (GHG) emsson s one of the global problems that caused clmate change n several countres. Ths envronmental problem demands a collaboraton of responsblty among countres to nternatonally reduce GHG emssons. Although Thaland s non-annex I country whch has no bndng GHG reducton commtment accordng to Kyoto Protocol, Thaland s encouraged to apply the new legal envronmental nstrument so as to acheve the approprate level global temperature for the exstence of lfe as well as sustanable long-term economc growth and socal development. Consequently, t s nterestng to study what economc approach can assst Thaland s GHG emsson reducton target. Among emtted sectors n Thaland, the energy-ntensve ndustry s one of the sectors that use plethora energy and release drect GHG emsson from ndustral process. Regardng to CO emsson contrbuted by the ndustral process, the cement sector s the largest emtter, compared to glass, lme, pulp & paper, and ron & steel sectors. If the government consders socal welfare as well as agrees to reduce natonal GHG emsson, the cement sector may be the frst targeted sector to control GHG emsson. Snce cement sector explots domestc natural resources to construct nfrastructure projects contrbutng economc development. Moreover, the market structure of Tha cement ndustry s an olgopoly one that could be an easy exercse to mpose economc measure at the begnnng. Thus, the objectve of ths study would lke to compare socal welfare of emsson tax scheme and emsson permt scheme as to whch scheme provdes greater welfare to the cement ndustry n Thaland n order to meet GHG emsson reducton target. Ths study could be used to be an example for controllng emtted sector wth olgopoly market structure. In addton, t wll provde nformaton to government of Thaland n order to mpose the new legal envronmental nstrument n the future by takng socal welfare nto account.. Lterature Revew The lterature revew can be dvded nto two parts whch are.) economc nstruments for GHG control and.) the economc fgures of the cement ndustry n Thaland.

3 Yavaluck S., Applyng Emsson Tax and Emsson Permt Schemes Controllng 3. Economc Instruments for GHG control Economc nstruments for envronmental management are mostly based on the concept of Polluter Pay Prncple (PPP) to nternalze the external or envronmental costs nto the cost of polluters (ether producers or consumers). In general, most of envronmental costs are generated by producton. If the PPP s appled to prvate frms, the frm s producton cost wll ncrease and then the prce of goods and servces wll be hgher. The hgher cost wll nduce producers to change ther behavors to produce less (as well as consumers to adjust ther behavors accordngly to hgher prce). The PPP wll nduce lower optmal producton level and consequently lower level of GHG emssons. Kaosa-ard and Rayanakorn (009) presented several economc nstruments for envronmental management that can be appled n Thaland such as admnstraton fees; user fees/charges; fnes; polluton tax/fees; marketable or tradable permts; product surcharge; depost-refund system; tax dfferentaton; performance bonds; and subsdy. However, ths study wll focus only on emsson tax and emsson permt schemes whch wll be specfcally appled to the olgopoly cement ndustry... Emsson Tax There are many theoretcal studes on emsson tax wth several types of market structures. Boumol and Oates (988) studed a perfect competton market whle other researchers studed mperfect competton markets. For example, Buchanan (969) and Barnett (980) studed monopoly, and Katsoulacos and Xepapadeas (995) as well as Renhorn (005) studed olgopoly. From these theoretcal studes, we found that an optmal degree of external cost nternalzaton depends on the market structure. In perfect competton market, an optmal emsson tax wll equal the margnal external (or damage) cost. Whle n monopoly, the optmal tax wll lower than the margnal damage cost. In contrast to n olgopoly, f t s ncluded the postve effect of brngng the number of frms closer to the second best welfare optmal, the optmal tax wll hgher than the margnal damage cost.

4 4 Southeast Asan Journal of Economcs (), June 04 In practces, several countres have used carbon tax (tax on carbon content) or energy taxes (tax on energy content) such as Fnland, Netherland, Sweden, Denmark (these countres have used emsson tax snce 990), England (snce 00) (Tantvasadakarn et al., 009). From the lessons of several countres that applyng carbon tax, we observe that ) the tax rate s gradually ncreased wth tme, ) the carbon tax rate s dfferent from sources and fuels (In England, the tax rate of natural gas at a rate of 0.5 pence/kwh, LPG at a rate of 0.07 pence/kwh, the electrcty usage at a rate of 0.44 pence/ kwh), and 3) the collectng system s n a manner of revenue neutral; the fscal revenues from tax are used to decrease other taxes so the government budget balance remans stable... Emsson Permt Emsson permt s a system that provdes the rghts to pollute, whch allocates the permt to enttes that release emssons. Ths system s not allowed enttes to buy or sell the permts. Ths permt system s appled to control GHG emsson by lmted the amount of permt ssued (n terms of ton of CO, for nstance). Another system s cap-and-trade approach. Under ths approach, a regulatory authorty sets the total quantty of emssons that enttes or partcpants are allowed to emt and allocates a number of tradable permt unts. An entty who has lower abatement cost to reduce ts emsson nternally below ts allowance lmt can sell unused allowance to other enttes that have hgher abatement cost n reducng ther own GHG emsson. The cap-and-trade approach or emsson tradng scheme (ETS) s generally called carbon market. The global carbon market can be categorzed nto two types: compulsory carbon market and voluntary carbon market. The compulsory carbon market, namely EU ETS, UK ETS, and NZ ETS, are wdely accepted n Annex Partes of UNFCCC. Voluntary carbon market s appled n varous countres such as Swtzerland, Japan, Australa, South Korea, Inda, US (e.g. Chcago Clmate Exchange) and Tawan. There are smlartes and dfferences n usng carbon tax and carbon market. The smlartes are ncreases n effcency of resource and decreases the overall abatement cost of GHG emssons n the socety (or n a certan nvolved sectors). Both systems encourage consumers and producers to change behavors to meet the optmal resource allocaton. The dfferences can

5 Yavaluck S., Applyng Emsson Tax and Emsson Permt Schemes Controllng 5 be analyzed n many aspects such as admnstraton cost, revenue transfer, prce stablty, and quantty of emsson control (Sutummakd et al., 009). Currently both carbon tax and emsson tradng schemes are under wdely dscusson among academcs, prvate sectors, and publc nsttutons. Some economsts such as Shapro (007) beleves that carbon tax s more effectve way to reduce GHG emssons than emsson tradng scheme because t s far, transparent and non-volatle n carbon prce.. The Economc Fgures of Cement Industry n Thaland The frst cement company n Thaland s SCG Cement Co., Ltd. (formerly known as Sam Cement Industry Co., Ltd), establshed n 93 wth producton capacty 4,000 ton per year. The second one was Jalaprathan Cement Publc Co., Ltd establshed n 958 and Sam Cty Cement Publc Co., Ltd establshed n 97. Before 990, there were barrers to entry n ths ndustry such as no new company been approved by the government. Because of hgh demand for cement n the constructon sector and publc nfrastructure, government allowed new companes to establsh and former frms to extend ther capacty to respond the hgh domestc demand. Nowadays (03) there are 8 cement companes and have producton capacty mllon tons per year. SCG Cement Co., Ltd has the largest share of cement producton capacty n Thaland, accounted for 4.3 % of total cement producton capacty (Fgure ). If Thaland s cement producton exceeds domestc demand, the excess can be exported (trend n shown n Table ). Major cement export markets n 009 are Bangladesh, Vetnam, Camboda, Myanmar, and UAE (OIE, 00). Table : Producton, Demand, and Export of Cement Industry Year Producton (Mllon tons) Domestc Demand (Mllon tons) Domestc Demand Growth (%) Clnker Exports (Mllon tons) Cement Exports (Mllon tons) Source: Tha Cement Manufacture Assocaton (03)

6 6 Southeast Asan Journal of Economcs (), June 04 Fgure : The Share of Cement Producton Capacty n Thaland Source: Tha Cement Manufacture Assocaton (03) Regardng to cement producton capacty n Thaland, we notce that over 80 percent of cement market share s controlled by only three bg frms whch are SCG Cement Co., Ltd, Sam Cty Cement Publc Co., Ltd, and IPI Polene Publc Co., Ltd. undoubtedly; the cement market structure n Thaland s an olgopoly one. In ths study, three bg frms wll be called the leader frm and the others are called the follower frms. 3. Methodology Ths secton represents three steps of methodology employed n ths analyss. The frst step s settng the four scenaros of emsson tax and emsson permt schemes to compare socal welfare. The next step s applyng the Stackelberg model to analyze partal equlbrum (prce and quantty of cement) n olgopoly cement market. The fnal step s conductng numercal analyss to socal welfare n four scenaros usng data from Tha cement ndustry, prevous lterature, and current prce of carbon credts.

7 Yavaluck S., Applyng Emsson Tax and Emsson Permt Schemes Controllng 7 3. Scenaros The study wll be conducted based on four scenaros as shown n Table,.e., one scenaro of emsson tax scheme and three scenaros of emsson permt schemes. For emsson tax scheme, we mpose the emsson tax to both leader and follower frms. In prncple and practce, t s necessary to mpose tax rate equally to all emtters. Therefore, only one scenaro for emsson tax scheme,.e., Scenaro, s consdered whch the same emsson tax rate s mposed on all polluters. In ths case, each frm wll make a decson on reducng CO emsson based on the gven emsson tax rate and abatement cost accordng to avalable abatement technology. For emsson permt schemes, more scenaros are requred for analyss. Ths s due to the complcaton and many ssues that needed to be rased. Some of these ssues nclude who should be capped or controlled, how permt should be dstrbuted, possblty of trade permt n the sector, etc. Three scenaros (.e., Scenaro, 3 and 4) of emsson permt schemes were chosen to be nvestgated n ths study. In Scenaro, both leader and follower frms are controlled through emsson permt; however, the expenses of these frms regardng the permt are dfferent. Partcularly, emsson permt aucton s appled to the leader frms whle some free emsson permts s gven to the follower frms. Nevertheless, all frms have to abate the rest of ther emsson wth ther avalable abatement technology and abatement cost. Snce most of the follower frms are small busness wth small market share, gvng free emsson permts would reduce ther burden of the polcy expenses. Moreover, snce the leader frm may be able to access better abatement technology or lower abatement cost (or both), t s reasonable for them to reduce ther own emsson frst and then ther leftover wll be charged by the government. For Scenaro 3 and 4, the measure s only provded to bg polluters (.e., the leader frm). In other words, the leader s allocated ntal free emsson permts and has to abate ther CO emsson. On the other hand, the follower frms are excluded from the regulaton. Ths s because the follower frms have smaller share of cement producton capacty n total ndustry producton whch leads to smaller producton and emsson at the lower level.

8 8 Southeast Asan Journal of Economcs (), June 04 In Scenaro 3, the follower frms do not need to abate ther emsson. In Scenaro 4, ncentves are gven to the follower frms to encourage them voluntarly to reduce emsson usng ther own nvestment of emsson reducton project. Specfcally, the follower frms are gven a rght to sell carbon credts to the leader frm who releases emsson at the hgh level correspondng to ther outputs. The leader frm should frstly purchase carbon credts from the follower frms and then buy addtonal permts from the government when ther credts do not enough to meet the desred producton level. Note that ths study does not allow tradng emsson permt across the sectors and also does not consder emsson from mport and export of cement producton. In other words, ths study s only lmted to domestc greenhouse gas control n the man emtter. Table : Scenaros of Emsson Tax and Emsson Permt Schemes Tax Measure Permt Measure () () (3) (4) Leader Frm Impose the same emsson tax rate to the leader frm and the follower frm Buy permt from the government n every desred CO emtted to atmosphere Get some free permt (ē ) from government -Get Free permt ē -Buy CER from the follower s CDM, f he wants to emt more than ē -Buy addtonal permt from the government when CER s not enough Follower Frm Get some free permt (ē ) from government Exclude from regulaton Invest n CDM-lke project Source: Author s Scenaro Clean Development Mechansm s one of the Kyoto mechansms. Its purpose has mutual beneft between developng countres (Non-Annex I of UNFCCC) and developed countres (Annex I of UNFCCC). The developng countres wll beneft from project actvty resultng n CER (Certfed Emsson Reducton) whch t can sell to the developed countres. The developed countres can use CER to contrbute to commtment of the Kyoto Protocol. In ths study, the CDM-lke project of the follower s not related to Kyoto Protocol.

9 Yavaluck S., Applyng Emsson Tax and Emsson Permt Schemes Controllng 9 Ths study assumes that the cement market s structurally an olgopoly and the emsson market s perfect competton. Thus, the Stackelberg model wll be appled to analyze the olgopoly cement market, leavng carbon market ntact from any polcy and frm s acton n emsson decson. 3. The Stackelberg Model In Tha cement ndustry, there are three bg frms whch produce the hgher producton than the others, they are the leader n the ndustry. To smplfy the strategc problem, we have to categorze the ndustry nto groups of frms, the leader frm and the follower frms accordng to the Stackelberg model. Under the Stackelberg model, the leader frm sets ts output frst and knows that the follower frms move sequentally playng Cournot strategy. Therefore, t s gven that Frm s the leader frm and Frm s the follower frms. The total cement s producton (Q) s the summaton of leader producton (q ) and follower producton (q ). Thus, Q = q+ q. Assume that the nverse demand functon takes the smple lnear form as n () P = f( Q) = a- bq () where, P s the market cement s prce, a s an ntercept, b s a slope of demand functon. But the leader and the follower frms have dfferent cost functons, TC (q, e ), whch each functon conssts of total producton cost (TPC ), total abatement cost (TAC ), and expense related to GHG reducton measure (e.g. emsson tax, emsson permt). It s assumed that the emsson tax rate (t) s equal to the margnal damage cost of emsson that caused by cement producton, and the prce of emsson permt (P p ) s gven by the government. The total cost functon n cases of emsson tax and emsson permt are shown n equaton () and equaton (3), respectvely. These total cost functon are the summaton of total producton cost (whch depends on the amount of producton), total abatement cost (whch s a functon of the CO reducton attempt), and the expense on emsson tax or emsson permt schemes.

10 0 Southeast Asan Journal of Economcs (), June 04 Emsson tax: TC ( qe, ) = TPC + TAC + t$ e () Emsson permt: TC ( qe, ) = TPC + TAC + P.( e -er ) (3) p where, t s emsson tax rate that s assumed to be correctly set by government to control CO emsson on the condton of the margnal abatement cost (MAC) s equal to the margnal damage cost (MDC) n cement ndustry. ( MAC = MDC = t / / Note that = frms and j = vctms.) frm. j P p s prce of CO emsson permt that s gven by the government. ē s the total amount of free permt allocated from government to TPC TPC = g(q ) depends on the quantty cement produced (q ), m = q s margnal producton cost (prvate cost). It s assumed that other factors (Z ) are constant over the analyss of ths study. TAC = h( 9), where TPC s total abatement cost functon, whch depends on CO reducton (9 ), 9 = E- e s the amount of reduced CO for frm =, TAC( 9) s defned as MAC q (q ) or the margnal abatement cost of TAC( 9) an ncremental cement output. It can be expressed as follow = q TAC ( 9) ( 9) E = - MAC( e).. The margnal abatement cost of an ( 9) q q ncremental cement output s depended on the amount of CO reduced (whch E s based on abatement technology whch s expressed n term of ) and q TAC( 9) ( 9) margnal abatement cost of emsson. Thus, MAC( e). = = ( 9) e TAC ( 9).( - ) ( 9) E s the maxmum CO generated by each frm. (It s depended on producton of frms) e s the amount of CO emtted nto the atmosphere.

11 Yavaluck S., Applyng Emsson Tax and Emsson Permt Schemes Controllng After we solve theoretcal model n olgopolstc cement market, we would get the equlbrum outcomes lke the leader producton (q * ), the follower producton (q * ), total producton (Q * ), the equlbrum prce of cement (P * ) and then we can formulate socal welfare functon n equaton (4) whch conssts of consumer surplus (CS) and producer surplus n the domestc cement market of leader (PS ) and follower (PS ) plus government revenue from measure (G) mnus damage from exstng emsson n socety SW = CS + PS+ PS+ G- Damage (4) * Q CS = # 6 - P * Q * (5) 0 PS = * * Pq -/ TC ( qe) (6), PS = * * Pq -/ TC ( q e ) (7), G = Government Revenue (8) n Damage = s$ c/ e m, for s > 0 (9) = It s assumed that damage functon s an ncreasng functon of GHG emssons at rate s > 0, and the margnal damage cost s an ncreasng functon of GHG emssons. To compare the socal welfare from emsson tax scheme (SW TAX ) and the socal welfare from emsson permt scheme (SW PER ), ths study consders four scenaros whch, Scenaro belongs to emsson tax measure, and three dfferent ones are emsson permt measures as a result of emsson tradng scheme s qute complcated and possess of many questons such as whom s capped by ths measure? How emsson permt s allocated to emtters? Can emtter buy rght to emt across frms? Thus, we should analyze more n emsson permt scenaros then they are provded n Scenaro, Scenaro 3, and Scenaro Data and Assumptons on Numercal Analyss Demand Functon: Gven that P = f( Q) = a- bq, t s found that the domestc cement market demand estmated by Wongsopt (00) can be Q = PR where Q t s domestc producton clnker t t

12 Southeast Asan Journal of Economcs (), June 04 equvalent (mllon ton/quarter) and PR t s average Portland retaled prce per quarter (,000 baht/ton). Snce total producton of cement n year term s Q = 4 $ Q t, then the adjusted demand functon can be wrtten as P = Q, where P s n term of,000 baht/ton and Q s n term of mllon ton per year. Total Producton Cost: TPC = g(q ) and TPC = m$ q as well as TPC TPC = m$ q, where m = s the margnal cost of producton. In ths q study the margnal producton cost of both the leader and follower wll be assumed to equate the average producton cost of Sam Cement Group (Table 3), that s m = m =,40 (baht/ton) whch s fve years (006-00) average cost. Table 3: SCG Cement Consoldated Fnancal Informaton Average SCG Cement Consoldated Fnancal Informaton Net Sales (mllon baht) 48,954 46,66 49,999 44,087 44,3 46,764.8 Cost and Expenses (mllon baht) 4,89 38,649 4,4 36,943 35,43 38,867. The Retaled Prces (On average, accordng to specfcaton) Mxed Cement Prce (Elephant Brand) (baht/ton) Producton (mllon ton) = Net Sales/Mxed Cement Prce Average Producton Cost (baht/ton) = Cost and Expenses/ Producton,373.4,753.4,806.6,480,453.4, ,996.94,80.6,364.55,078.3,970.09,38.77 Source: Author s calculaton an average based on and www. moc.go.th

13 Yavaluck S., Applyng Emsson Tax and Emsson Permt Schemes Controllng 3 Total Abatement Cost: Gven that TAC = h( 9), t s assumed that the total abatement cost s TAC( 9) = ba, where 9 = A = E- e. Assume that margnal abatement cost of the leader and follower are MAC = ba and MAC = ba, respectvely. It s note that the leader frm has better abatement technology b =, b =. Theoretcally, MAC = MAC = MAC should provde the most effcent level of GHG reduced. Thus, for the smplcty, t s assumed that the margnal abatement cost of all frm are equal at optmal MAC MAC levels of GHG reducton of each frm. Therefore, A =, A =. b b The total amount of GHG abatement such that A = A+ A. MAC MAC ( b+ b) $ MAC b$ b A = A+ A = + =, MAC = $ A = $ A b b b $ b ^b + b h 3 Regardng to the concept of the effcent level of GHG reducton (or emsson) where prce of CER equals to MAC, the MAC s assumed to be approxmately 300 baht/tonco (CER s prce today s approxmately 0 $/tonco wth the exchange rate of 30 baht/$). Thus, MAC = 300 = $ A 3 MAC 300 and the total abatement level of A = 450 and hence A = = = 300, b MAC 300 A = = = 50. Total abatement cost of the leader frm s b TAC( 9) = ba () (300) 45, 000 = $ =. Total abatement cost of the follower frm s TAC( 9) = ba () (50),500 = $ =. Wth the concept of effcent level of GHG reducton at frm level, emsson tax rate should be equal to MAC. Thus, t s assumed that emsson tax (t * ) = 300 baht/ton CO and the each frm decdes to emt under the condton of t * = MAC = ba = b $ ^E -e * h for =,. The optmal t * b emsson (e * ) s equal to E -. A study n Thaland found that a three-year ( ) average of the carbon ntensty of Tha cement ndustry s 0.84 ton CO /ton cement (Towprayoon et al, 00). Snce carbon doxde s the major greenhouse gas 3 (GHG) emsson from the cement ndustry, the parameter of emsson ntensty per output n the model s set to The greenhouse gas emsson s controlled n Kyoto Protocol has 6 types; CO, CH 4, N O, HFC, PFC, and SF 6

14 4 Southeast Asan Journal of Economcs (), June 04 * * t Therefore, the optmal emsson of the leader frm s e = q- = b q = q- 300, and the optmal emsson of the follower frm s * n * t 300 e = q- = q- = q- 50. As gven that Damage = s. c/ e, b m = for s > 0, and under the effcent condton where emsson tax rate should be * * set equal to the margnal damage cost, t = $ s$ e/ eo, thus s = t = $ e/ = eo = The summary of parameters used n numercal test s shown n Table 4. Table 4: Parameters on Numercal Test Parameter on Demand Functon (Wongsopt (00)) Parameter n Producton Cost ( Emsson Tax Rate, Prce of Permt, Prce of carbon credt, Margnal Abatement Cost of Emsson Emsson Intensty Per Output a = 6,49 (baht/ton-cement) b = 0.6 (baht/(ton-cement) ) m = m =,40 (baht/ton-cement) B = m + m (baht/ton-cement) t = P p = P CER = MAC(e) = 300 (baht/tco ) E q E = = 0.84 (tonco q /ton-cement) Parameter on Damage Functon s = (baht/000(tonco ) ) Source: Author s Synthess 4. Results 4. Theoretcal Results of Socal Welfare n 4 Scenaros The summaton of all terms n socal welfare functon n equaton (4) s reduced to equaton (0). Each equaton conssts of 3 parts whch are the same n every scenaro but t s dfferent n combnatons (such as consumer surplus, leader s surplus, follower s surplus, government revenue, and damage). The frst part s the net beneft of consumer surplus and the producer s revenue whch s affected by the prce and the quantty of producton. The second part s the cost of producton and abatement actvty by frms whch s affected by

15 Yavaluck S., Applyng Emsson Tax and Emsson Permt Schemes Controllng 5 the cost and the level of producton. The last part s the damage cost to envronment whch s affected by the level of emtted emsson to atmosphere. Net beneft of consumer surplus and the producer s revenue Q * / / 9 0 = = SW = # ^a-bqh dq- = TPC( q) + TAC ( ) G -Damage (0) Cost of producton and abatement actvty by frms Damage cost to envronment The results of theoretcal study n socal welfare functons are shown n Table 5. In frst part, Scenaro 3 and Scenaro 4 provde the hghest net beneft of consumer surplus and the producer s revenue. The consumer surplus n Scenaro 3 (as well as n Scenaro 4) s hgher than that of Scenaro and Scenaro because consumer can consume more and face the lower s cement prce. In second part, total producton costs are depended on the level of producton. The total producton of Scenaro 3 s equal to that of n Scenaro 4 so t provdes the same level of total producton of frms. In addton, the total producton of Scenaro s equal to that of n Scenaro so t provdes the same total producton of each frm as well. Furthermore, the total abatement cost of the leader and the followers are depended on the amount of CO reduced that dffers among the leader and the follower frms. In thrd part, the damage cost s the hghest n scenaro that gvng free permt allocaton to the leader and no GHG regulaton to the follower (Scenaro 3). The hgher producton of the follower frm wthout abatement actvty, the hgher the damage cost to envronment s expected. The summatons of socal welfare functon n theoretcal term are complcated to conclude whch scenaro provdes the greatest socal welfare n cement ndustry. Then, ths study wll further apply numercal analyss by usng avalable data from Tha cement ndustry and prevous lterature to answer the objectve of the study.

16 6 Southeast Asan Journal of Economcs (), June 04 Table 5: Socal Welfare Functon from Emsson Tax Scheme and Emsson Permt Schemes Socal Welfare Functon = () + () - (3) Consumer Surplus and Producer s Revenue Total Producton Cost and Total Abatement Cost Damage Cost / / s e e = = Scenaro 5 a a( T T B) ( T T) B B ( T T ) 3 b " , TPC ( q) + TAC ( 9 ) $ ^ + h Scenaro 3 b 5 a " - a( F + F + B) - ( F + F) B-B -( F + F), TPC ( q) + TAC ( 9 ) / / s e e = = $ ^ + h Scenaro 3 3 b " 5 a -ab -B -4aI -4BI - 4I, / TPC ( q) + TAC ( ) s$ ^e + E h = 9 Scenaro 4 3 b " 5 a -ab -B -4aH -4BH - 4H, / TPC ( q) + CDM TAC ( 9) + TAC ( 9 ) s$ ^e + e h = Note: a s an ntercept, b s a slope of demand functon. s s a parameter determned damage functon, e s CO emtted to atmosphere, E s the maxmum CO generated by each frm, 9 = E- e s the amount of reduced CO, for =, I = +, t determnes the margnal producton cost of frms. T t. B m m E q E q p =, T = t., F = P., F = P., TAC ( 9 ) E =, and H = PCER. are parameters that present the margnal abatement cost of an ncremental cement q q output under several schemes. E q p E q

17 Yavaluck S., Applyng Emsson Tax and Emsson Permt Schemes Controllng 7 4. Numercal Results The numercal socal welfare as a result of consumer surplus, producer surplus (the leader s surplus and the follower s surplus), government revenue, and damage are shown n Table 6. Table 6: Numercal Socal Welfare Unt: Bllon Baht Socal Welfare Consumer Surplus Producer Surplus Leader s Surplus Follower s Surplus Government Revenue Damage Net Socal Welfare Impose Tax to Both Frms () Leader Aucton () & Follower s free permts s equal to desred level Leader s free permts s equal to desred level (3) Leader s free permts s equal to desred emsson level &CDM (4) () () (3) (4) (5) =()+()+(3)+(4)-(5) Source: Author Consderng all components, the greatest net socal welfare s presented n Scenaro 4, and followed by Scenaro 3. In contrast, the lowest net socal welfare s shown n Scenaro and Scenaro. If we analyze the net socal welfare n composton, t shows that the benefts are dfferent to stakeholders as the followngs, In consumer pont of vew, consumers are better off n Scenaro 3 and Scenaro 4, compared wth Scenaro and Scenaro because they can consume more and face the lower cement s prce.

18 8 Southeast Asan Journal of Economcs (), June 04 In producer noton, the producer surplus s dfferent as a result of the expenses on emsson measures and the opportunty to create carbon credt though follower emsson reducton project. The leader frm enjoys free permt allocaton n Scenaro 3 because the free permts gve rght to emt GHG wthout an addtonal abatement cost. When the leader s allocated the free permts equal to the desred level of emsson, ths provdes the hghest leader s surplus. Whle the follower frm enjoys no cap and the chance of nvestng emsson reducton project for sellng carbon credts to the leader frm n Scenaro 4, t acheves the hghest follower s surplus. In government pont of vew, f the government objectve s maxmzng revenue, Scenaro (emsson tax) generates the hghest government revenue. In envronment aspect, the least envronmental damage cost s presented when both emtters are controlled by emsson measures (Scenaro and Scenaro ). 5. Conclusons In Thaland, the cement sector s the largest emtter from the ndustral process. In order to control emsson of ths sector, we can apply economc nstruments that sut the characterstc of ndustry. The objectve of the study s to study whether emsson tax scheme or emsson permt scheme would gve rse to greater socal welfare n the cement sector n Thaland. The Stackelberg model s appled n theoretcal study of olgopoly cement market wth four dfferent scenaros of emsson tax and emsson permt schemes. These scenaros are ) mposng the same emsson tax rate to both the leader and the follower frms, ) applyng emsson permts aucton to the leader frm and gvng some free permts to the follower frm, 3) gvng free permts to the leader frm and excludng the follower frm from the regulaton, and 4) gvng some free permts to the leader frm and allowng the leader buy carbon credt from the follower frm who nvests n CDM-lke project. Fnally, the study employs numercal test for socal welfare functon obtaned from theoretcal model by usng avalable data of cement ndustry n Thaland and prevous lterature knowledge.

19 Yavaluck S., Applyng Emsson Tax and Emsson Permt Schemes Controllng 9 The result of the study shows that the greatest socal welfare s the Scenaro 4 that nvolvng the follower frm voluntary nvestng CDM-lke project and allowng the follower to sell CER-lke to the leader frm. Socal welfare n the emsson tax scheme (Scenaro ) s equal to that of the emsson permt aucton to leader and provdng ntal free permts to follower (Scenaro ). In terms of stakeholder benefts are dfferent among consumer, producer, and government. Consumer would prefer Scenaro 3 and Scenaro 4 than Scenaro and Scenaro. The leader frm would prefer free emsson permt measure. The follower frm would prefer Scenaro 4. The government would prefer emsson tax scheme because t generates the hghest government revenue. Ths study concludes that socal welfare under emsson permt scheme s hgher than (or equal to) emsson tax scheme. Moreover, varous desgns of emsson permt scheme provde dfferent results n socal welfare. Among stakeholders, there are dfferent ponts of vew to prefer ether emsson tax measure or emsson permt measure because they only concern ther own benefts. To dentfy amount of GHG emtted to atmosphere and emsson reducton actvty (abatement level), the level of emsson tax rate and prce of permt are mportant. Regardng technology, the better technology of producton,.e., the lower emsson ntensty per output n pollutng frms, can ncrease the socal welfare. Fnally, the government should take more responsbltes to make stakeholders understand and take socal welfare nto consderaton. When government chooses GHG measures, t s mportant to take damage cost nto consderaton n socal welfare as well as consumer surplus and producer surplus. 6. Polcy Implcatons The analyss of socal welfare of emsson tax measure and emsson permt measure can provde some recommendatons to government as the followngs. If government needs to promote the role of emsson reducton project, CDM-lke project s preferred because t helps to reduce the envronmental damage from global warmng mpact and t provdes the greatest socal welfare to Tha cement ndustry, compared to other scenaros. If government

20 0 Southeast Asan Journal of Economcs (), June 04 would lke to control GHG emtters va the emsson permt measure, t can allocate free permt equal or less than the desred level of GHG (requested by the prvate sector) dependng on the government purposes. If the government would lke the permt scheme to be poltcally accepted by the emtters, the desgn of permt allocaton system should be an ncentve to nvolve all emtters. The hgher amount of free permts allocated to frms, the hgher producer surplus at the same level of producton of frms. In another aspect, f the government wants to rase fund for the envronment actvtes, the amount of free permt allocated to emtters can be set less than the desred level. Ths wll nduce emtters to buy more permts from the government (va aucton or settng prce of permt). If government objectve s maxmzng revenue, emsson tax scheme s preferred than the emsson permt scheme. Ths s because (a) the emsson tax s generally mposed to all emtters and (b) the emsson tax s mposed on all GHG or CO emtted whch the emsson permt scheme s mostly appled free permt allocaton. However, the emsson permt scheme can also generate revenue to the government f the whole amounts of permts are auctoned. If government wants to mplement emsson tax scheme, the lower emsson tax rate the hgher socal economc welfare. In the future, f Tha government has an nternatonal commtment to reduce GHG at natonal level or the developng countres, such as Thaland, are encouraged to apply the new legal envronmental nstrument, the government should foster the potental sector to voluntary reduce GHG by gvng any of ncentves to that sector. Moreover, to be ensure for emsson reducton project nvestor, the government should dentfy emtters who cannot reduce the GHG emsson buyng carbon credts otherwse government may purchase all the credts. There s a lesson learned from voluntary emsson reducton n South Korea. Korea s government supports project development costs n emsson reducton project and purchases Korea Certfed Emsson Reducton (KCERs) to provde rewards for mtgaton actons and create motvatons for voluntary carbon market, snce 007.

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