Climate Policy

Greener and Fairer: A Progressive Environmental Tax Reform for Spain

Summary: Governments that impose taxes on carbon dioxide and other greenhouse gas emissions can benefit from a cleaner, more climate-friendly environment and a revenue stream that can be tapped to lower other taxes and create jobs. But environmental taxes may also exact an excessive financial burden on low-income households, which spend a much greater fraction of their budgets than richer households do on heating oil, natural gas and electricity. This concern has limited the use of green taxes in Spain, where emissions are taxed at levels far below average for the European Union, which seeks to lower emissions across the continent to fulfill its 2015 Paris Agreement climate pledge.

Now a new study by researchers at the University of Oldenburg (Germany), the Basque Center for Climate Change, and the MIT Joint Program on the Science and Policy of Global Change shows that low-income households in Spain can actually benefit from environmental taxes if revenues are redistributed to all taxpayers. Using a computational model to assess the environmental and economic impacts of a green tax reform policy in which revenues are recycled in equal amounts to households in annual lump-sum payments, the researchers found that the policy significantly reduces emissions without imposing economic hardship on any segment of the population. 

Evaluating India’s climate targets: the implications of economy-wide and sector specific policies

India’s economy is booming, driving up electric power consumption to unprecedented levels. The nation’s installed electricity capacity, which increased fivefold in the past three decades, is expected to triple over the next 20 years. At the same time, India has committed to limiting its carbon dioxide emissions growth; its Paris Agreement climate pledge is to decrease its carbon dioxide emissions intensity of GDP (CO2 emissions per unit of GDP) by 33 to 35 percent by 2030 from 2005 levels, and to boost carbon-free power to about 40 percent of installed capacity in 2030. Can India reach its climate targets without adversely impacting its rate of economic growth—now estimated at seven percent annually—and what policy strategy would be most effective in achieving that goal?

To address these questions, researchers from the MIT Joint Program on the Science and Policy of Global Change developed an economy-wide model of India with energy-sector detail, and applied it to simulate the achievement of each component of the nation’s Paris pledge. Representing the emissions intensity target with an economy-wide carbon price and the installed capacity target with a Renewable Portfolio Standard (RPS), they assessed the economic implications of three policy scenarios—carbon pricing,  an RPS, and a combination of carbon pricing with an RPS. Their findings appear in the journal Climate Change Economics.

As a starting point, the researchers determined that imposing an economy-wide emissions reduction policy alone to meet the target emissions intensity, simulated through a carbon price, would result in the lowest cost to India’s economy. This approach would lead to emissions reductions not only in the electric power sector but throughout the economy. By contrast, they found that an RPS, which would enforce a minimum level of currently more expensive carbon-free electricity, would have the highest per-ton cost—more than ten times higher than the economy-wide CO2 intensity policy. Combining an economy-wide carbon price with an RPS would, however, bring the price per ton of CO2 down from $23.38/tCO2 (in 2011 US$) under a standalone carbon-pricing policy to a far more politically viable $6.17/tCO2 when an RPS is added. If wind and solar costs decline significantly, the cost to the economy would decrease considerably; at the lowest wind and solar cost levels simulated, the model projects that economic losses under a carbon price with RPS would be only slightly higher than those under a standalone carbon price. Thus declining wind and solar costs could enable India to set more ambitious climate policies in future years without significantly impeding economic growth.

 
 
The Economic, Energy and Emissions Impacts of Climate Policy in South Korea

Summary: South Korea’s Nationally Determined Contribution (NDC) to the Paris Agreement on climate centers on a pledge to reduce its greenhouse gas emissions by 37 percent in 2030 from levels projected for that year under business-as-usual policies. To reach that target, the government has launched two main climate policy instruments: a cap-and-trade system (South Korean Emissions Trading System, or KETS) and a fuel economy standard for light-duty vehicles. But according to projections by the independent Climate Action Tracker, South Korea’s current policies are insufficient to fulfill its Paris pledge, and by 2030 would result in more than double the national emissions level set in 1990.

To better understand the emissions and economic impacts of South Korean climate policies, and how they can be optimally deployed to meet the 37-percent emissions reduction goal, researchers at the MIT Joint Program on the Science and Policy of Global Change have developed and applied a customized economy-wide model of the country. The study appears in the journal Climate Change Economics.

Using the model, the MIT researchers projected that under KETS with fuel economy standards, the country would require a 2030 carbon price of $88 per metric ton of carbon dioxide-equivalent emissions to meet its NDC target. Excluding economic benefits from avoided climate damages, the combined policies would reduce the 2030 GDP by $21.5 billion (1.0 percent) and household consumption by 8.1 billion (0.7 percent). The fuel economy standard accounts for $1.1 billion of the GDP loss and $4.2 billion of the household consumption loss.

Health Co-Benefits of Sub-National Renewable Energy Policy in the U.S.

Abstract: State and local policy-makers in the U.S. have shown interest in transitioning electricity systems toward renewable energy sources and in mitigating harmful air pollution. However, the extent to which sub-national renewable energy policies can improve air quality remains unclear. To investigate this issue, we develop a systemic modeling framework that combines economic and air-pollution models to assess the projected sub-national impacts of Renewable Portfolio Standards (RPSs) on air quality and human health, as well as on the economy and on climate change. We contribute to existing RPS cost-benefit literature by providing a comprehensive assessment of economic costs and estimating economy-wide changes in emissions and their impacts, using a general equilibrium modeling approach. This study is also the first to our knowledge to directly compare the health co-benefits of RPSs to those of carbon pricing.

We estimate that existing RPSs in the “Rust Belt” region generate a health co-benefit of $94 per ton CO2 reduced ($2–477/tCO2) in 2030, or 8¢ for each kWh of renewable energy deployed (0.2–40¢/kWh) in 2015 dollars. Our central estimate is 34% larger than total policy costs. We estimate that the central marginal benefit of raising renewable energy requirements exceed the marginal cost, suggesting that strengthening RPSs increases net societal benefits. We also calculate that carbon pricing delivers health co-benefits of $211/tCO2 in 2030, 63% greater than the health co-benefit of reducing the same amount of CO2 through an RPS approach.

Representing the Costs of Low-Carbon Power Generation in Multi-region Multi-sector Energy-Economic Models

Summary: A challenging task for long-term electricity projections is capturing the fundamental technical and economic implications of the competition between generation technologies. A key issue is the intermittency of renewables in situations where the currently-existing dispatchable capacity retires and is no longer available. One potential solution for improving forecasts lies in using more detailed electricity models, such as hybrid capacity expansion-dispatch models, and different frameworks for combining economy-wide models with detailed electricity models exist. However, these detailed models are available only for a limited set of countries or regions within a country, which makes their application to global or multi-region projections problematic.

At the same time, multi-region, multi-sector dynamic energy-economic models, such as computable general equilibrium (CGE) models, are valuable tools that can capture important interactions between multiple sectors and regions. Most of these models approximate the major dynamics related to the competition between different power generation technologies by representing technological details in power generation in an aggregated fashion. This paper provides a simple but instructive method for modeling the change in competiveness of different electricity technologies, including a range of carbon capture and storage (CCS) technologies, in multi-region multi-sector dynamic energy-economic models.

For illustration, the authors incorporate this method into the MIT Economic Projection and Policy Analysis (EPPA) model, and run several scenarios. Their analysis and results provide insight on the relative costs of deployment of different low-carbon power generation technologies depending on assumptions about carbon policy stringency.

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