Economic Instruments to Manage Air Quality: Evidence of Taxes vs. Emissions Trading Schemes at the metropolitan area of Concepcion

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1 Economic Instruments to Manage Air Quality: Evidence of Taxes vs. Emissions Trading Schemes at the metropolitan area of Concepcion Paulina Schulz Cristobal de la Maza Isabel Rojas Julio Recordón Sandra Briceño

2 Outline Introduction Air pollution Policy instruments available Metropolitan area of Concepcion Air quality problem Emissions inventory Policy options Methodology Taxes vs ETS (Prices vs Quantities) Comments on policy choice ETS proposal Scenarios Results Final Remarks

inventory Policy options Methodology Taxes vs ETS (Prices vs

3 Air pollution in Chile PM2.5 3

4 Policy instruments available under environmental law 13,300 Quality standards Emission standards Decontamination and Prevention plans Activated after a quality standard has been exceeded or is above 80% of the regulated value, respectively They could use economic instruments such as taxes or emissions trading schemes An ETS would require the enactment of a special law System of Environmental Impact Assessment Management Plans Others 4

the regulated value, respectively They could use economic instruments such as taxes or emissions trading

5 Additional background In the Metropolitan Region, since 1992 exits a credit based scheme for PM, but market has not developed mainly due to high transaction costs, uncertainty and poor oversight In 1994, environmental law was enacted In 2010, new environmental institutions Ministry of the Environment, Superintendence of the environment, Environmental courts In 2003, a law of tradable emission permits was sent to Congress, without approval of the idea of legislating 5

In 2010, new environmental institutions Ministry of the Environment, Superintendence of the environment,

6 Outline Introduction Air pollution Policy instruments available Metropolitan area of Concepcion Air quality problem Emissions inventory Policy options Methodology Taxes vs ETS (Prices vs Quantities) Comments on policy choice ETS proposal Scenarios Results Final Remarks

7 Metropolitan area of Concepcion 5.7% of Chilean population 945,000 inhabitants 221 km 2 (85 mi 2 ) Second industrial center of the country Forestry, Fishing, Agricultural and Industrial Sector. Hosts 100% of iron and steel industry 7

8 µg/m3 PM2.5 µg/m3 PM10 Air quality problem (PM10, PM2.5) PM10: Concentrations above 80% of quality standard PM 10 Concentration PM2.5: Concentrations above quality standard December 2011: draft prevention plan for MP10 was released, proposing measures to recover air quality Chiguayante Coronel Hualpén Talcahuano Tomé PM2.5 Concentration 10 0 INIA, Chillán Libertad San Pedro de la Paz 8

5: Concentrations above quality standard December 2011: draft prevention plan for MP10 was released,

Emissions inventory Sector PM10 PM2,5 Fire wood burning Ton/year % Ton/year % Number of sources 7,953 69 7,723 77 136,000 Industry 3,308 29 2,152 21 90* forest and agricultura l burning 29 0.

9 Emissions inventory Sector PM10 PM2,5 Fire wood burning Ton/year % Ton/year % Number of sources 7, , ,000 Industry 3, , * forest and agricultura l burning Transports *90 emitters, which account more than 90% of industrial sector emissions Source: Análisis General de Impacto Económico y Social del Anteproyecto Plan de Prevención Atmosférica Concepción Metropolitano, Ministerio del Medio Ambiente,

6 165 2 *90 emitters, which account more than 90% of industrial sector emissions Source: Análisis General de

10 Outline Introduction Air pollution Policy instruments available Metropolitan area of Concepcion Air quality problem Emissions inventory Policy options Methodology Taxes vs ETS (Prices vs Quantities) Comments on policy choice ETS proposal Scenarios Results Final Remarks

11 Methodology: benefit-cost analysis Benefits: chronic dose-response assessment n Benefit p = (e (β pj C pi ) 1) P ijp y 0j VU j j i=1 β pj : Unitary risk coefficient of health effect j and pollutant p [(ug/m 3 ) -1 ]. C pi : Change in pollutant concentration p at location i [ug/m 3 ]. P ijp : Exposed population i to pollutant p that can suffer health effect j [persons] y 0j : Basal incidence rate [cases/ (person- year)] VU j : Monetary value of each effect j [UF/case] Control costs Function of stack flow rate (Equation 8, Control Strategy Tool, COST Equations Documentation, USEPA, 2010.) A cost per ton is computed for each source The cost curve of the industry is built using the cost and abatement potential of every source 11

P ijp : Exposed population i to pollutant p that can suffer health effect j [persons] y 0j : Basal incidence rate [cases/ (person- year)] VU j : Monetary value of each effect j

12 ETS vs taxes when marginal benefits are increasing Costs uncertainty $/Ton MC high MC MC low MB p* Taxes have smaller deadweight loss when uncertainty in costs and increasing MB q* q q* q q* E. Reduction (Ton) Deadweight welfare loss when tax fixed at p* Deadweight welfare loss when reduction fixed at q* +

in costs and increasing MB q* q q* q q* E.

13 ETS vs taxes when marginal benefits are increasing Costs uncertainty Deadweight welfare loss when fixing q*, Metropolitan area of Concepcion (p*,q*): Compliance cost of 12.4 MMUSD/year ~0.3 MM USD/year p* ~1.2 MM USD/year q* 13

Metropolitan area of Concepcion (p*,q*): Compliance cost

14 ETS vs taxes when marginal benefits are increasing Benefits uncertainty $/Ton MC MB high MB p* MB low Taxes and ETS are equivalent when uncertainty in benefits and MB increasing in abatement q* q* q* E. Reduction (Ton) Welfare loss when fixing tax at p* or reduction at q*

equivalent when uncertainty in benefits and MB increasing in

15 ETS vs taxes when marginal benefits are increasing Benefits uncertainty Deadweight welfare loss when fixing p*or q*, Metropolitan area of Concepcion (p*,q*): Compliance cost of 12.4 MMUSD/year ~2.8 MM USD/year p* ~2.6 MM USD/year q*

p*or q*, Metropolitan area of Concepcion (p*,q*):

16 Comments on emissions trading vs taxes Both are matter of law ETS: Requires a special law, which enables the use of tradable emission permits Taxes: presidential initiative bill If marginal benefits are increasing on abatement, taxes would be either more efficient or equivalent to an ETS An ETS would be preferred by regulated entities Only an ETS would ensure compliance of environmental standards, which corresponds to a constitutional right 16

abatement, taxes would be either more efficient or equivalent to an ETS An ETS would be preferred by regulated

17 Outline Introduction Air pollution Policy instruments available Metropolitan area of Concepcion Air quality problem Emissions inventory Policy options Methodology Taxes vs ETS (Prices vs Quantities) Comments on policy choice ETS proposal Scenarios Results Final Remarks

18 Policy scenarios Scenarios Plan Command and Control ETS Description This scenario corresponds to the fulfillment of measures established on the draft prevention plan 1,2,3. The requirement to reduce emissions of PM and / or SO2 by 30% from their emissions to 2008 is fulfilled on sources that are less expensive within each facility 4. This scenario considers the application of emission standards that would achieve the same level of reductions than 'Plan scenario, but without flexibility within facilities. Allows trading emission allowances, and considers that the 90 biggest sources in the area could participate in the market 5. [1] The cost curve for this scenario is built at firm level instead of source level [3] Emission standard for Thermoelectric It is considered part of the baseline. [4] PM industrial facilities are those with emissions equal or superior to MP 100 ton / year. SO2 industrial facilities are those with emissions greater than or equal to 250 tonso2/year. [5] Including sources that are not subject to regulation in accordance with the provisions in the Draft of prevention plan. 18

This scenario considers the application of emission standards that would achieve the same level of reductions than 'Plan scenario, but without flexibility within facilities.

19 MC [USD/Ton MP2.5] Policy scenarios costs curves 20,000 18,000 16,000 14,000 C&C: Abatement cost of 7.3 MMUSD/year Plan: Abatement cost of 5.2 MMUSD/year 12,000 10,000 ETS: Abatement cost of 2.8 MMUSD/year 8,000 6,000 4,000 2, ton/year ,000 1,200 1,400 1,600 1,800 2,000 MP 2.5 reductions Plan ETS Command and Control Red. Industry Plan 19

3 MMUSD/year Plan: Abatement cost of 5.2 MMUSD/year 12,000 10,000 ETS: Abatement cost of 2.

20 MC [USD/Ton MP2.5] ETS and offsets costs curves Offsets: heaters replacement program 20,000 18,000 16,000 14,000 12,000 10,000 Abatement cost of 2.8 MMUSD/year 8,000 6,000 4,000 2, ton/year ,000 1,200 1,400 1,600 1,800 2,000 MP 2.5 reductions Abatement cost of 1.65 MMUSD/year ETS or Tax ETS and offsets Red. Industry Plan 20

21 Outline Introduction Air pollution Policy instruments available Metropolitan area of Concepcion Air quality problem Emissions inventory Policy options Methodology Taxes vs ETS (Prices vs Quantities) Comments on policy choice ETS proposal Scenarios Results Final Remarks

22 Final comments ETS would be the policy option that ensures environmental goals achievement ETS in the metropolitan area of Concepcion could achieve the same outcome than Plan scenario, but with a cost 46% lower Including offsets would reduce further compliance costs, achieving savings of 68% compared to Plan scenario. Importance of the enactment of a law 23

23 THANKS!

24 ANNEX 25

Taxes to local pollutants Fuente: Elaboración propia en base a Información de European Environment Agency (http://www2.oecd.org/ecoinst/queries/).

25 Taxes to local pollutants Fuente: Elaboración propia en base a Información de European Environment Agency ( Nota: La información presentada es sólo referencial y no necesariamente corresponde a la totalidad de sistemas de permisos de emisión vigentes. 26

26 Emissions trading schemes Fuente: Elaboración propia. Nota: La información presentada es sólo referencial y no necesariamente corresponde a la totalidad de sistemas de permisos de emisión vigentes. 27

27 Unitary values per avoided event [USD/event] year 2014, Normal scenario Under Above 65 Mortality Long Term Hospital admissions Emergency Room Visits Productivity Loss Asthma Cardiovascular Chronic respiratory Pneumonia Asthma Working Days Restricted activity days Minor restricted activity days

28 Unitary Risk Coefficients Under Above 65 Mortality Long Term 0.00% 0.93% 0.93% 0.93% Hospital admissions Emergency Room Visits Productivity Loss Asthma 0.33% 0.33% 0.33% 0.00% Cardiovascular 0.00% 0.15% 0.15% 0.16% Chronic respiratory 0.00% 0.24% 0.24% 0.12% Pneumonia 0.00% 0.00% 0.00% 0.40% Asthma 0.44% 0.00% 0.00% 0.00% Working Days 0.00% 0.46% 0.46% 0.00% Restricted activity days Minor restricted activity days 0.00% 0.48% 0.48% 0.00% 0.00% 0.74% 0.74% 0.00% 29

29 Industry cost curves Control Strategy Tool (CoST), USEPA PM: Equation 8, stack flow rate as the primary variable for control cost calculation USD CapitalCost = CC_F ft 3 GV ft3 s 60 s min min Capital recovery factor = i (1+i)VU (1+i) VU 1 CC Anual USD year CT_OyM = C_OyM_F CT Anual USD year = CapitalCost Capital recovery factor USD ft 3 min GV ft3 s 60 s min CC_F: Capital recovery factor C_OyM_F: Operation and Maintenance factor = CC Anual + 4% CapitalCost + CT_OyM 30

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