Valuation Study

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Cost-effective Co-control Policies of Local Air Pollutants and Greenhouse Gases

Attributes

Medium: Air

Country: China

Analytical Framework(s): Economic Analysis, Energy Analysis

Unit(s): Prices (Pollution Abatement Costs)

Study Date: 2011

Publication Date: 2011

Major Result(s)

Study Note: This research quantitatively evaluated the environmental and economic impacts of policy and technology options to reduce the emission of local air pollutants (SO2, NOx and PM) and CO2 in China's iron and steel sector. A top-down economy model and a bottom-up technology model were combined through a soft-linkage to simulate both economy and technology system, which is a useful improvement compared with solely using either one of them. According to the simulation results, carbon tax coupled with an equivalent cut of value added tax (VAT) is more cost-effective compared with other carbon tax regimes, and mandatory application of PAFP-FGD is more cost-effective compared with other command-and-control (CAC) policy options.

Study Details

Reference: Liu Zhaoyang, Mao Xianqiang, Liu Shengqiang and Kevin Jianjun TU. 2011. Co-control of Air Pollution and GHGs in China's Iron and Steel Sector: an Integrated Modeling Assessment of Policy and Technology Options. EEPSEA Research Report, No. 2011-RR6.

Summary: This research focused on the comparative assessment of policy and technology options to reduce the emission of local air pollutants (SO2, NOx and PM) and CO2 in China's iron and steel sector. The policy options include different carbon tax regimes and command-and-control (CAC) policies of mandatory applications of end-of-pipe (EOP) emission control technologies. The technology options include production technologies and EOP emission control technologies in iron and steel sector. The assessment and comparison of the environmental and economic impacts of those policy and technology options were based on an integrated assessment model (IAM), which through a soft-linkage combined a top-down Computable General Equilibrium model and the bottom-up part of a Canadian Integrated Modeling System. According to the simulation results, carbon tax coupled with an equivalent cut of value added tax is more cost-effective compared with other carbon tax regimes, presenting co-control effects on different pollutants and leading to double dividend in both economic and environmental welfare. Meanwhile, mandatory application of PAFP-FGD is more cost-effective compared with other CAC policy options, significantly cutting down SO2 and NOx emissions, but leading to more CO2 emissions.

Site Characteristics: This case study focused on China's iron and steel sector, which is a major industrial source of local pollutants and CO2 emissions in China. According to China Iron and Steel Association, in 2009 the sector is responsible for 9.2% of CO2, 7% of SO2 and 15% of PM in the total industrial emissions of the country. The sector is faced with huge pressure of pollution control due to the national targets of China to reduce energy and carbon intensity, and major pollutant emissions. However, there could be some conflicts between the emission control of CO2 and local air pollutants, especially in EOP measures. For instance, the desulfurization facilities cut down SO2 emissions, but consume more electricity and indirectly cause more CO2 emissions. In order to significantly and rapidly reduce local air pollutions, environmental regulators of China still incline to CAC policies of mandatory applications of EOP emission control equipment. Comparatively, it would be more cost-effective if local air pollutions and CO2 can be simultaneously controlled with the same policies and technologies. That idea of "co-control" is feasible because local air pollutions and CO2 have a common major source of fossil fuel combustions. Some intensive-based policies, such as carbon tax, could provide "co-control" effects through the adjustment of production scale and the improvement of energy efficiency in iron and steel sector. Those policies should be considered to achieve "co-control" effects with relatively lower costs.

Comments: In order to assess and compare the environmental and economic effects of incentive-based and CAC policies, this research used an IAM which combines a top-down economy model and a bottom-up technology model. In a specific industry like the iron and steel sector, incentive-based policies could achieve emission reduction through both the adjustment of production scale and the improvement of technology innovation. The IAM captures both aspects to fully explore the potential efficacy of incentive-based policies. According to the simulation results, scale and technology effects have comparable contributions to emission reduction in carbon tax policy scenarios, indicating that it is important to model both aspects in the ex ante assessment of environmental economic policies. However, the cost-effectiveness of the two categories of policy options cannot be fairly compared at this stage because the model is still at industrial level without firm heterogeneity, and the major merit of Pigovian tax in cost-effectiveness is that it allows firms with different abatement costs to reduce different amounts of emissions, compared with the unique treatment of CAC policies.

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