Analysis of the impacts of combining carbon taxation and emission trading on different industry sectorsIntroductionMethodsThe model for CO2 reductionEmission tradingCO2 abatement targetPermit allocationEmission trading priceImpacts on industrial GDPOutcomes from model simulationThe base scenarioThe carbon tax scenarioResults and discussionPermit allocationImpacts on industrial GDPThe annual effectsThe accumulated effectsConclusionsReferencesEnergy Policy 36 (2008) 722–729Analysis of the impacts of combining carbon taxation and emissiontrading on different industry sectorsCheng F. Leea,, Sue J. Linb, Charles LewiscaDepartment of Environment and Resources Engineering, Diwan University, 87-1, Nanshih Li, Madou, Tainan 721, Taiwan, ROCbDepartment of Environmental Engineering, SERC, National Cheng Kung University, 1 University Road, Tainan 701, Taiwan, ROCcDepartment of Resources Engineering, National Cheng Kung University, 1 University Road, Tainan 701, Taiwan, ROCReceived 23 August 2007; accepted 31 October 2007Available online 3 December 2007AbstractApplication of price mechanisms has been the important instrument for carbon reduction, among which the carbon tax has beenfrequently advocated as a cost-effective economic tool. However, blanket taxes applied to all industries in a country might not always befair or successful. It should therefore be implemented together with other economic tools, such as emission trading, for CO2reduction.This study aims to analyze the impacts of combining a carbon tax and emission trading on different industry sectors. Results indicatethat the ‘‘grandfathering rule (RCE2000)’’ is the more feasible approach in allocating the emission permit to each industry sector. Resultsalso find that the accumulated GDP loss of the petrochemical industry by the carbon tax during the period 2011–2020 is 5.7%. However,the accumulated value of GDP will drop by only 4.7% if carbon taxation is implemented together with emission trading. Besides, amongpetrochemical-related industry sectors, up-stream sectors earn profit from emission trading, while down-stream sectors have to purchaseadditional emission permits due to failure to achieve their emission targets.r 2007 Elsevier Ltd. All rights reserved.Keywords: Carbon taxes; Emission trading; Industry sectors1. IntroductionThe Kyoto Protocol went into effect on February 16,2005. In the post-Kyoto phase, Taiwan, as a newlyindustrialized country, needs to draft feasible strategieswith lower economic impact for the coming CO2reduction.Application of price mechanisms has been the impor tantinstrument for carbon reduction, among which the carbontax (CT) has been frequently advocated as a cost-effectiveeconomic tool. Some countries in Europe, such as Nether-lands, Denmark, Sweden, Finland, and Norway, haveimplemented CTs for over 10 years, while Italy, Germany,and UK also began to levy CTs since 1999–2001. Also,emission trading (ET) has been recommended as one of theflexible mechanisms in the Kyoto Protocol to reducegreenhouse gas emissions in a cost-effective way. The EUhas introduced a carbon-trading system in the beginning of2005 as a means for achieving its CO2reduction target. Inthe first pha se of the system, 2005–2007, power plants andsome energy-intensive industries are included (Kara et al.,2006). It is therefore essential to simulate and to comparethe impacts of various carbon reduction tool combinationson industry sectors.The effectiveness of carbon taxation has been discussedin many relevant resear ches. A study by Baranzini et al.(2000) showed that CTs may be an interesting policyoption and that their main negative impacts may becompensated through the design of the tax and the use ofthe generated fiscal revenues. Nakata and Lamont (2001)applied a partial equilibrium model to evaluate the impactsof CTs on energy systems in Japan. Their results suggestthat CTs decrease CO2emission according to a proposedtarget, but also cause a shif t in fuel use from coal to gas. InNew Zealand, a computable general equilibrium model isused to assess the relative effectiveness of CTs on theeconomy, and results show that carbon taxation wouldARTICLE IN PRESSwww.elsevier.com/locate/enpol0301-4215/$ - see front matter r 2007 Elsevier Ltd. All rights reserved.doi:10.1016/j.enpol.2007.10.025Corresponding author. Tel.: +886 6 5718888x874;fax: +886 6 5718014.E-mail address: [email protected] (C.F. Lee).adversely affect GDP (Scrimgeour et al., 2005). However,blanket taxes applied to all industries in a country mightnot always be fair or successful. Norway’s high CT since1991 contributed to only 2% reduction in CO2emissionsbecause of widespread tax exemptions and inelasticdemand of various sectors affected by this tax (Bruvolland Larsen, 2004). As in the case of Norway’s relativelyhigh CT since 1991 and its resulting low CO2reduction,Gerlagh and Lise (2005) developed an economic partialequilibrium model to demonstrate that CTs have a modesteffect on emissions. Johansson (2006) theoretically eval-uated the possibility of diff erent policy instruments tocontribute to reductions in indust rial CO2emissions whilepreserving the competitiveness of the industry.However, blanket taxes for CO2reduction applied to allindustries in a country might not always be fair orsuccessful (Lee et al., 2007). The authors constructed afuzzy goal programming model to assess the effects of CTson different industries (Lee et al., 2007). The resultsindicated that some industries show improved CO2reduction whi le others fail to achieve their stabilizationtargets. The results also suggested that the CTs should beimplemented together with other economic tools, such ascarbon trading. Thus, industries that show significantcarbon abatement may sell their surplus emis sion allow-ances to industries that need additional permits, and thenthe industrial GDP losses induced by CO2reduction can becompensated. The impac ts of ET on the industries havebeen studied in the literature. Szabo´et al. (2006) present aglobal simulation model to quantitatively analyze theimpacts of three carbon ET schemes on the cement sector.In Finland, the impacts of the EU CO2ET on power plantoperators, energy-intensive industries, and other consumergroups were analyzed by Kara et al. (2006). Their resultsfound that large windfall profits were estimated to incur toelectricity producers in the Nordic electricity market, whilethe metal industry and private con sumers wer
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