the pricing of carbon emissions from business perspective in northeast asia

The Pricing of Carbon Emissions from Business Perspective in

Northeast Asia

Presenter: Xianbing Liu

Senior Policy Researcher/Task Manager

Kansai Research Centre, IGES, Japan

21 December, 2013 ACMSA 2013

Presentation Structure

❖ Background of the MBIs project

❖ Surveys and the samples under the project

❖ Major results from the project studies ❏ Determinants for energy saving practices

❏ Company’s MBIs awareness and subjective acceptability

❏ Carbon prices affordable for the companies;

❏ Choice experiment of carbon pricing policies

❖ Research policy implications

❖ Major outputs and efforts in impact generation

2


Overall Framework of MBIs Project

C2: Current status of firm’ s energy saving practices and analyses of the determinants for identifying policy gaps and directions

C4: Firm’ s awareness and acceptability to carbon emission related tax tools

C6: Development and evaluation of firm’ s preferable policy alternatives with individual tool or combined approaches

Lessons learned Lessons learned

Synthesis summary and integrative policy recommendations

Gap analysis

Literature review and expert hearing

C1: Overview of policies related to industrial energy efficiency and carbon mitigation in the three target countries

Web accessible data

Onsite interviews and hearings

Questionnaire survey

C5: Firm’ s awareness and acceptability to carbon emission trading scheme

Questionnaire surveyQuestionnaire survey

Gap analysis

FY2010

FY2011

FY2012

C3: Analysis of the effectiveness of financial subsidies to firm’ s efforts in carbon mitigation, e.g., subsidies to energy saving investments.

Onsite hearings

Basic ideas: a) Advantages of MBIs; b) Importance of clear and stable policy signals; c) Successful MBIs

Practices in Europe; d) Laggard policy progress in Asia; e) Core competence of IGES; f) Research field of KRC

Geographical focus: China, Japan

and the Republic of Korea

Policy focus: Financial subsidy, carbon

taxes and GHG emissions trading scheme

Overall objective:To support the related policy

discussions from company’s

viewpoints in this region

3


Climate Policies in the Three Countries

Japan China Korea

Targets

To reduce its 1990 emissions by 6% from 2008-2012 To reduce emissions by 25% from 1990 levels by 2020 (With the premise) To reduce emissions by 80% from 1990 levels by 2050 Improving energy efficiency at least by 30% by 2030

To reduce national energy intensity by 20% by 2010 and to increase renewable energy in the national mix to 15% by 2020 To cut CO2 emissions per unit of GDP by 40-45% by 2020 compared with 2005 levels (Voluntary target)

To reduce by 30% by 2020 compared with BAU levels (Voluntary target)To achieve 46% improvement of energy efficiency by 2030To increase renewable energy in the national energy mix to 11% by 2030

Major policies for industrial sector

Keidanren Voluntary Action Plan GHG Emissions Calculation, Reporting and Disclosure System Feed-in-tariff for renewable energies Subsidies from NEDO, METI and MOEJ Energy-related taxes GHG ETS on trial Carbon tax policy

Energy Efficiency Standards Top 10,000 Energy-consuming Enterprises Program Subsidies and rewards for energy-saving Differential electricity pricing system Resource-related tax Pilot GHG ETS in 5 cities and 2 provinces Carbon tax policy in discussions

Target Management System (TMS) Energy Use Reporting System Energy Audit Requirement Financial subsidies Preferable loans Tax reduction Energy-related tax GHG ETS since 2015 Carbon tax policy in discussions

4


Surveys under MBIs Project and the Samples

Year Item China Korea Japan

FY2010

Objective Measure company’s practices in energy saving and identify the determinants

Method Questionnaire survey and econometric analysis

Target companies

Based in Taicang city,Jiangsu Province

362 business sites of 244 companies

Samples collected

125, with 80% from chemical, textile & dyeing and machinery sectors

66 business sites, 60% from power, petro-chemical and paper sectors

FY2011

Objective Measure company’s MBIs awareness, acceptability and carbon price affordability

Method Questionnaire survey, econometric analysis and WTP modeling estimations

Target companies

Three energy-intensive sectors: Iron & steel, cement and chemical industries

Samples collected

170, more than 70% belonging to the three focused sectors

62, all from the three sectors and 93.5% is TMS target companies

FY2012

Objective Measure the company’s preference to design alternatives of carbon pricing tools The same as the studies of FY2010 and 2011 in China and KoreaMethod Policy choice experiment and modeling analysis

Target companies

Companies in western Shanxi Province and eastern Jiangsu Province

Focused on the three sectors as in FY2011

465 large energy-using companies in Hyogo

Samples collected

201, almost half from each province150, more than 60% from the three sectors

230, half from food, chemical, steel and electronic sectors

5


Determinants for Industrial Energy Saving

Determinant factorsEnergy saving practice level (15 activities)

China (N=125) Korea (N=66) Japan (N=230)

External pressures

Pressure from the government

Pressure from industrial association

Pressure from business competitor(+)***

Internal factors

Awareness of energy management problems(+)**

Willingness to improve energy efficiency(+)** (+)***

Top management support(+)* (+)* (+)**

Internal training specific for energy saving(+)*** (+)* (+)**

Control

Current energy price level(+)**

Company size(+)* (+)***

Industrial sector belongings

Note: ***, ** and * respectively means significant at 1%, 5% and 10% level; (+) means the positive relationship.

6


MBDC Card for Estimating Cost AffordabilityQuestion: The energy prices would be increased due to the introduction and implementation of market-based climate polices, such as imposing energy taxes or carbon taxes in the sector of energy production and transition. Accordingly, the industrial company’s energy consumption cost would be increased. We would like to understand the viewpoint of your company to the energy cost increases due to the climate policy interventions. Please circle one letter to each increase ratio to indicate the affordability degree of your company.

Your company’s choice Energy

cost

increase

ratio (%)

Very low;

Easily

acceptable

Not high;

Acceptable

Moderate;

Barely

acceptable

High;

Rejection

Very high;

Strong

rejection

0.1 ○A B C D E

0.3 ○A B C D E

0.5 A ○B C D E

0.7 A ○B C D E

1.0 A ○B C D E

3.0 A B ○C D E

5.0 A B ○C D E

7.0 A B ○C D E

10.0 A B ○C D E

15.0 A B C ○D E

20.0 A B C ○D E

30.0 A B C ○D E

50.0 A B C D ○E

70.0 A B C D ○E

100.0 A B C D ○E

15 increaseoptions inEnergycosts

Fivelevels of acceptance

7


Affordability Responses of Samples in China (N=111)

Energy Cost Increase Ratio

(%)

Strong Rejection

(%)

Rejection(%)

Barely Acceptable

(%)

Acceptable(%)

EasilyAcceptable

(%)

Total(%)

0.1 0.0 0.0 1.8 33.3 64.9 100.0

0.3 0.0 0.0 5.4 45.1 49.6 100.0

0.5 0.0 0.9 14.4 50.5 34.2 100.0

0.7 0.0 4.5 17.1 50.5 27.9 100.0

1.0 1.8 8.1 37.8 35.1 17.1 100.0

3.0 6.3 14.4 43.2 27.9 8.1 100.0

5.0 7.2 18.9 46.9 21.6 5.4 100.0

7.0 11.7 29.7 42.3 12.6 3.6 100.0

10.0 19.8 42.3 29.7 6.3 1.8 100.0

15.0 31.5 41.4 24.3 2.7 0.0 100.0

20.0 46.0 41.4 10.8 1.8 0.0 100.0

30.0 55.9 37.8 5.4 0.9 0.0 100.0

50.0 75.7 21.6 2.7 0.0 0.0 100.0

70.0 84.7 15.3 0.0 0.0 0.0 100.0

100.0 87.4 12.6 0.0 0.0 0.0 100.0

8


Affordability of All the Samples in China (N=111)

02

04

06

08

01

00

Pe

rce

nta

ge o

f th

e sa

mpl

es

0 20 40 60 80 100Energy cost increase ratio (%)

Observed data of easily acceptable & acceptable Observed data of barely acceptable and over

Regression curve of easily acceptable & acceptable Regression curve of barely acceptable and over

50% of the samples corresponds to the ratios of 2.8% and 9.3% on the two curves.

9


Carbon Prices Affordable for the Companies

Country China (N=170; Unit: Yuan/t-CO2) Korea (N=62; Unit: KRW/t-CO2)

SectorIron & steel

(N=34)Cement(N=17)

Chemical(N=27)

Iron & steel(N=11)

Cement(N=5)

Chemical(N=20)

MEANAFFORD 8.8% 7.7% 9.9% 2.5% 2.8% 2.6%

Affordable carbon price 42.7 38.6 83.7 3,770 2,600 3,950

Country Japan (N=230; Unit: JPY/t-CO2)

SectorFood processing

(N=29)Chemical(N=26)

Iron & steel(N=11)

Electronics(N=12)

MEANAFFORD 2.0% 3.1% 1.5% 2.6%

Affordable carbon price 683 1,062 426 801

a) Similar acceptable ratios in energy cost increases due to pricing of carbon for companies of Japan and Korea, which are much lower than Chinese companies; b) Similar range of carbon prices affordable for companies in Japan and China (5-13 $/t-CO2);c) Carbon prices affordable for Korean companies are 2.3-3.5 $/t-CO2;d) The business affordability is much lower than the price level needed for realizing Copenhagen pledges of the three countries.

10


Company’s Awareness and Acceptability of MBIs

Policy Type Policy itemPolicy awareness Policy acceptability

China Korea Japan China Korea Japan

MBIs

Economic incentives

Subsidies for energy saving projects 3.75 3.21 2.82 4.19 3.18 3.60

Soft loan for energy saving investments 3.03 1.80 3.43 3.36

Tax credits for energy saving projects 3.56 3.27 2.83 4.21 3.82 3.79

Subsidies and grants for energy efficient products 3.31 3.71 3.54 3.66

Carbon pricing tools

Carbon tax policy 2.87 2.93 2.74 3.36 2.02 2.63

GHG emissions trading scheme 2.86 3.31 2.51 3.61 2.09 2.65

Command-and-control regulations (CCRs)

Energy saving target and responsibility system 3.63 3.66

Energy use and GHG emissions reporting system 3.66 3.63

Voluntary approaches (VAs)

Certification of energy efficient products 3.85 2.73

Voluntary energy saving agreements 3.85 3.41 3.10

Note: The data is the mean of scores. For policy awareness: ‘1’ = ‘completely unknown’; ‘3’ = ‘moderate understanding’; ‘5’ = ‘very clear’. For policy acceptability: ‘1’ = ‘completely unacceptable’; ‘3’ = ‘moderate acceptance’; ‘5’ = ‘fully acceptable’.

11


Payback Time for Energy Saving Investment

Percentage of the samples (%)

Payback time (Years) <0.5 0.5-1 1-2 2-3 3-5 5-10 >10 In total

China (N=127) 5.5 12.6 30.7 30.7 13.4 4.7 2.4 100.0

Korea (N=62) 3.2 12.9 48.4 33.9 1.6 100.0

Japan (N=220) 0.5 2.3 7.3 22.3 41.4 24.5 1.8 100.0

a) 1-3 years of payback time expected by Chinese and Korean companies;b) The payback time expected by Hyogo companies is longer at 3-5 years;c) High expectation to the profitability of energy saving investments reveals the effectiveness of carbon pricing policies;d) Providing subsidies shorten the payback time and remove barrier of upfront cost, and is therefore useful at the earlier stage of LCT applications.

12


Attributes and Levels of Carbon Tax and GHG ETS

A: Carbon Tax Policy B: GHG ETS

AttributesLevels

AttributesLevels

China (Yuan/t-CO2) Korea (KRW/t-CO2) China Korea

Tax rate1) 10; 2) 30; 3) 50;4) 100

1) 1,000; 2) 2,000;3) 3,000; 4) 5,000

Cap setting

1) Based on the company’s historical emissions;2) Based on the sector’s advanced emission levels;3) Differentiated measures for the existing and new

established companies

Tax relief measures

1) No relief; 2) Preferential treatment to energy-intensive companies; 3) Preferential treatment to companies actively reducing

emissions to a certain level

Allowance allocation

1) All for free; 2) 5% auction, the rest for free;3) 10% auction, the rest for free;4) 30% auction, the rest for free

Use of tax revenues

1) General budget; 2) Specific fund for energy saving and climate change ； 3) To reduce company’s other taxes

Penalty 1) A fine the same of market price of carbon emissions; 2) 3 times of market price; 3) 5 times of market price

Starting time

1) During the 13th FYP (2016-2020); 2) During and after the 14th FYP

1) Since 2015;2) Since 2021

Compliance period

1) 1 year; 2) 3 years

Criteria for carbon leakage

1) Carbon intensity;2) Trade intensity

13


Design for Choice Modeling

An example format of choice experiment

Option A

Option B

Change in attribute level

from A to B (+: Better; -: Worse)

Attribute

A1 B1 +

A2 B2 -

A3 B3 +

A4 (Price)

B4 (Price)

+

Tick a box ☐ ☐

An example of contingent ranking

Option A Option B Option C

Attribute

A1 B1 C1

A2 B2 C2

A3 B3 C3

A4 (Price) B4 (Price) C4 (Price)

Ranking of options: 1: ; 2: ; 3: .

An example of pair-wise comparisons

Option A Option B Change in attribute level

from A to B (+: Better; -: Worse)

Attribute

A1 B1 +

A2 B2 -

A3 B3 +

A4 (Price)

B4 (Price)

+

Tick one level: 1--2--3--4--5--6--7--8--9--10

Strongly prefer A Strongly prefer B

An example of contingent rating

Attribute Option A: A1; A2; A3; A4

Tick one level showing your preference:

1--2--3--4--5--6--7--8--9--10

Very low preference Very high preference

Applied for this research

14


Experiment Design and Choice Set Examples

Policy attribute Option A01 Option B01

Tax rate (Yuan/t-CO2) 50 10

Tax relief measure No relief measurePreferential treatment to energy-

intensive companies

Use of tax revenues General budgetSpecific fund for energy saving

and climate change

Starting time During and after the 14th FYP During and after the 14th FYP

Please tick the one you prefer □ □

Policy attribute Option A01 Option B01

Cap settingBased on the company’s historical

emissions

Based on the historical emissions for the existing companies, and the sector advanced

emission levels for the new entrants

Allowance allocation 3% auction, the rest for free All for free

Penalty A fine of 3 times of the market price A fine of 5 times of the market price

Criteria for carbon leakage industry

Carbon intensity Trade intensity

Please tick the one you prefer

□ □

◆ Design method is the same as carbon tax policy;

◆ An example set of GHG ETS in Korea.

◆ Design Expert 8.0 was used;◆ D-optimal design applied;◆ 12 Choice sets constructed;◆ Two versions, 6 sets for each;

◆ An example set of carbon tax policy in China.

15


Attributes Determining Company’s Policy Choices

The choice of carbon tax policy The choice of GHG ETS

Attribute China Korea Attribute Korea

Tax rate (TAXRATE)(-)*** (-)***

Benchmarking for cap setting (CAP-B)(+,-)***

Relief to energy-intensivecompanies (RELIEF-B)

(+)*** (+)*** Hybrid of grandfathering and benchmarking (CAP-C)

(+,-)***

Relief to energy efficient companies (RELIEF-C)

(+)*** (+)** Auction ratio for allowance allocation (ALLOCATION)

(-)***

Specific fund for climate change (REVENUE-B)

(+)** (+)** A penalty of 3 times of credit market price (PENALTY-B)

(-)***

Use to reduce company’s other taxes (REVENUE-C)

A penalty of 5 times of credit market price (PENALTY-C)

Starting time (TIME) (-)*** Use carbon intensity as leakage risk criteria (LEAKAGE)

(+)***

Obs. 1,041 900 900

Note: ***, ** and * individually means significant at 1%, 5% and 10% level; (+) and (-) means the positive and negative relationship, respectively.

Analysis models applied:

MNL: Multinomial LogitRPL: Random Parameter LogitLC: Latent Class Model

16


WTP Values of Non-price Policy Attributes

The choice of carbon tax policy The choice of GHG ETS

Attribute China (Yuan/t-CO2) Korea (KRW/t-CO2) Attribute Korea (%)

RELIEF-B-65.9 -1,804

CAP-B16.2

RELIEF-C -65.4a -1,607 CAP-C 12.9

REVENUE-B -23.2 -678 PENALTY-B 13.3

REVENUE-C -18.6 a 125 PENALTY-C 6.8

TIME 6.4 a 1,665 LEAKAGE -14.7

Note: Tax rate is used as the denominator for carbon tax and the auction rate for allowance allocation is the denominator for GHG ETS; a The estimated WTP is not statistically significant.

Example explanations:

◆ Setting relief measure for energy-intensive sector (RELIEF-B) is the same as a decrease of 65.9 Yuan/t-CO2 of tax rate in influencing the company’s policy choice;

◆ Similarly, using the tax revenue earmarked for climate change (REVENUE-B) rather than as general budget (REVENUE-A) equals to a decrease of 23.2 Yuan/t-CO2 in tax rate.

17


Policy Implications of the MBIs Project

Overall, this project studied the application of MBIs, especially carbon pricing

tools, for enhancing energy saving and carbon mitigation from the business

perspective;

The identification of factors influencing company’s energy saving practices

clarifies the direction for future policy efforts;

Estimations of carbon price level affordable for the companies confirm the

difficulty for closing the policy gap, and provide meaningful referendums for the

development of carbon pricing policies;

The policy experiment confirms the principles for the design of carbon pricing

policies, including carbon tax and GHG ETS, and indicates the options preferable

for the industry;

The practical way is to combine a carbon tax with wide coverage but low tax rates

with domestic GHG ETS focusing large emitters. The revenues from carbon

pricing shall address R&D and earlier applications of LCT.

18

Invited presentations:1) Symposium of UNDP2) Sao Paulo Univ., etc.Present at conferences:

e.g., EAERE, GCET, JSEEPS, KAPF, etc.

4+(2)

Speedy

Outputs Generation

National policy

makers & regional

policy platform

KRC/IGES

Organizations in China:

-Universities: Tsinghua, Tongji- Research Institutes: ERI/NDRC, RIFS/MOF- National Government: MOEP- Local governments, etc.

Organizations in Korea:

- Research Institutes: KEI, KECO, KEEI, GGGI- Government: MOE, MOKE- Universities- etc.

Policy brief

Networking

Outcomes and Impact Generation

1+(1)

1

1+(1)

(1)

Networking

21 December, 2013 ACMSA 2013 19


Thank you for your attention!

20

the pricing of carbon emissions from business perspective in northeast asia

Documents

renewable energy

industrial energy efficiency

pricing of carbon emissions

national energy mix

national energy intensity

carbon taxes

carbon mitigation

current status of firms