contingent valuation method and carbon tax in mitigating...

Contingent Valuation Method and Carbon Tax in Mitigating CO2 Emissions from Road Transport

Sector: A Literature Review

Monika Gupta (Doctoral Student)

Economics Area

[email protected]

Indian Institute of Management Lucknow

[email protected]

Agenda • Introduction

• Carbon Tax as a Cost-effective Tool

• Research Gaps• Research Gaps

• Models Development • Contingent Valuation Method

• Decomposition Analysis

• Optimal Carbon Tax for Vehicle Emission and Scenario Analysis

• Future Research Problems And Concluding Remarks12/4/2014 Monika Gupta 2

Introduction

Introduction Research Gaps Models Development Conclusion and Future

Research Problems

Carbon Tax as a Cost-

Effective Tool

12/4/2014 Monika Gupta 3

Introduction

• Transport contributes around 13% in world’s Green House Gas (GHG)emissions. Within transport sector, road transport has 73% share (IPCC,2007)

• 95% of all world's transportation energy comes from petroleum basedfuel

Introduction Research Gaps Models Development

Future Research

Problems And

Conclusion


effective Tool

fuel (IPCC, 2007)

• Transport sector has big share around 4.8% in Indian GDP (MORTH, 2011-12)

• Responsible for about 10% of the total energy consumption (IEA, 2008)

• Huge consumption of fossil fuels by various vehicles leads to increasein GHG emissions and other pollutants


• Among the various measures to reduce fuel consumption carbon taxis the cost effective measure (Baumol and Oates, 1988; Mankiw, 2006)


Research Problems


Effective Tool

• However, in a country like India, design and implementation of carbontax on transport could be difficult, because of the diversity inpopulation and their awareness about transport related problems


• Additionally researchers such as Stern (2007), Metcalf (2007), Shapiro(2007) and Nordhaus (2008) advocate steeper carbon pricing policies toavoid generating irreversible "tipping points" in the climate system


Research Problems


Effective Tool

• For emission reduction in transport sector, tax is primarily leviedeither as fuel tax on the fuel price (UK, Japan, Norway, Costa Rica) orat the time of diesel and gasoline vehicle purchase (South Africa,Ireland)


• Before adopting any monetary measure it is important to knowpeople’s WTP for effective implementation of any policy measure,especially in case of carbon tax


Research Problems


Effective Tool

especially in case of carbon tax

• WTP can be derived through contingent valuation method (CVM)which is very popular in literature (Holvad, 1999; Berrens et al., 2004; Guo et al.,2007; Dubourg et al., 1997)


Author Summary Country of study

Carlsson and

Johansson-

Stenman (2000)

This paper quantifies individual willingness-to-pay measures of improved air

quality in 1996 by using the CVM. They found that WTP was increasing with

income, wealth, and education. It is higher for men, members of environmental

Sweden


Research Problems


Effective Tool

organization, people who own their houses and live in big cities.

Belhaj (2003) This paper deals with the estimation of WTP for 50 per cent reduction of air

pollution caused by road traffic. It presents the evidence that people of Morocco

are interested in reducing air pollution problem. Further, social and economic

variables are found to be critical in determining WTP.

Rabat-Salé

(Morocco)


Author Summary Country of study

Xie et al. (2004) They investigate that how CVM can be used to design charge and compensation

polices for phasing out polluting vehicles. WTP for staying on the road and

minimum WTA (willingness to accept) compensation for staying off the street

Bangkok,

Thailand


Research Problems


Effective Tool

are also estimated. Econometric analysis shows that household income, fuel

costs, use of motorcycles or public transit affect the value of WTP and WTA.

Voltaire et al.

(2013)

This study dealt with preference uncertainty in contingent willingness to pay for

a nature protection programme. If a respondent is certain about his/her WTP

then he/she will pick a single value for WTP otherwise he/she will go for interval

values.

Gulf of

Morbihan

(France)


Carbon Tax as a Cost-effective Tool


Research Problems


Effective Tool

Carbon Tax as a Cost-effective Tool


• To correct the negative externality, Arthur C. Pigou suggested a monetarymeasure and pricing instrument i.e., a carbon tax

• It works on the principle of ‘the polluter pays’


Research Problems


Effective Tool

• Many economists agree that pollution taxes are the cost-effective way toreduce GHG emissions (Baumol and Oates, 1988; Mankiw, 2006; Sitglitz, 2006; Izzo, 2007)

• But to explore carbon taxes and support them environmental awareness isimportant (Oberhofer and Furst, 2012).


• The related literature broadly supports that any monetary value suchas carbon tax works as an incentive towards environmental friendlybehaviour (Michaelis and Davidson, 1996; Schipper et al., 1997)


Research Problems


Effective Tool

behaviour (Michaelis and Davidson, 1996; Schipper et al., 1997)

• Loureiro et al. (2013) demonstrate the importance of public attitudes inthe acceptability (and thus effectiveness) of policies designed toreduce GHG emissions from transport


• Brouwer et al. (2008) show that free riders problem has a negative influence onpassenger’s willingness to participate in voluntary offset schemes and suggestcompulsory climate change tax. The study confirms that passenger’s willingnessto pay (WTP) is highly influenced by the effectiveness of the tax


Research Problems


Effective Tool

• Hsu et al. (2008) explained that people resist any green tax because of thesuspicion that government will not use tax revenue rationally

• Carbon taxes can be designed as revenue neutral; in this way it will help toimprove in total welfare regardless of environmental gain (Srivastava and Rao, 2010)


• Fuel tax has proved useful in influencing fuel demand and associatedCO2 emissions in many countries (Sterner, 2007)

• Researcher suggested different tax rates for transport sector

• Nordhaus (2008) estimated total social cost or discounted damages


Research Problems


Effective Tool

• Nordhaus (2008) estimated total social cost or discounted damagesfrom driving 10000 miles was found $30 assuming that cost of 1 tonof carbon is $30

• Fisher-Vanden et al. (1997), Zhao et al. (2012), Tol (2012) suggesteddifferent carbon tax rates for India


• Barker et al. (2008) assess• The feasibility of a 50% reduction in CO2 emissions by 2050

• To achieve this target, policy is to rise carbon price to $100/tCO2 by 2050,which can be attained through CO2 permits and carbon taxes


Research Problems


Effective Tool

• Chatterjee et al. (2007)• Annual pollution abatement cost for a passenger car complying with Euro III

norms as Rs 7,190 and Rs 6,624 for Andhra Pradesh and Himachal Pradesh

• Pollution abatement cost includes the cost of upgrading vehicular technologyand improving fuel quality


Research Gaps


Research Problems


Effective Tool


Research Gaps

• Few studies which specifically focus on transport related GHG emissions in India(Badami, 2005; Singh, 2006; Chatterjee et al., 2007; Bandyopadhyay and Thukral, 2010)

• Literature supports (Schipper et al., 1997; Loureiro et al., 2013) understanding of people’sperception before adopting any policy measure because it varies from country to


Research Problems


Effective Tool

perception before adopting any policy measure because it varies from country tocountry, but it is not in practice in India

• To evaluating consumer preference for pricing environmental externalities CVM isbroadly used (Holvad, 1999; Berrens et al., 2004; Guo et al., 2007), but it has not beenexplored in knowing people’s perception for carbon tax in Indian transport


• Scope of fiscal economic instruments etc. in combating GHG emission. Becausefiscal instrument helps to neutralize the regressive effect of tax through revenuerecycling

• Literature supports the hypothesis of double dividend attained by revenue


Research Problems


Effective Tool

• Literature supports the hypothesis of double dividend attained by revenuerecycling (Xie et al., 2004;, Zhang and Baranzini, 2004; Patuelli et al., 2005; Bureau, 2011), but it hasnot been effectively used in India, it will help in more equal distributive effect oftax (Srivastava and Rao, 2010)

• There is need to address the relationship between energy use for transport andbehavioural variables like people’s perception, awareness, willingness to pay etc.(Hsu et al., 2008)


Model Development


Research Problems


Effective Tool


Model Development

• An important and effective valuation technique to know people’spreference in monetary terms

Contingent Valuation Method (CVM)


Research Problems


Effective Tool

• Based on Hicksian measure of consumer surplus

• Tries to derive willingness to pay (WTP) to have benefit and willingness toaccept (WTA) to forego benefit



Research Problems


Effective Tool


• Identification and description

• Questionnaire

Different steps in CVM method


Research Problems


Effective Tool

• Questionnaire

• Sample frame

• Sampling technique

• Data collection


Decomposition Analysis : Log Mean Divisia Index approach (LMDI) (Angand Zhang, 2000; Ang, 2005; Lu et al., 2007)

Decomposition Analysis


Research Problems


Effective Tool

• Helps to quantify the contributions of the factors which significantlyimpact the change of CO2 emissions

• A weighted sum of relative changes because CO2 emissions fromenergy consumption is related to several factors



Research Problems


Effective Tool


Carbon Tax Scenarios

• Scenario is an intimation of reality and a way to visualize the future

Optimal Carbon Tax For Vehicle Emission And Scenario Analysis


Research Problems


Effective Tool

• Scenario is an intimation of reality and a way to visualize the future

• Helps to analyse the effects of implementation of carbon tax in Indiaif it is introduced in transport sector

• To see the distributional effect


• Long-range Energy Alternative Planning System (LEAP)

• Broadly used (Pradhan et al., 2006; Cai et al., 2008) worldwide including India forenergy and environmental policy analysis and climate change


Research Problems


Effective Tool

energy and environmental policy analysis and climate changemitigation assessment

• An integrated modelling tool helps to facilitate modelling of policesunder different scenarios in medium to long term


• Scenarios can be built on the basis of following criterion –

• Different carbon tax rates

• Back casting scenario planning (Hojer and Mattsson, 2000; Shiftan et al., 2003;


Research Problems


Effective Tool

• Back casting scenario planning (Hojer and Mattsson, 2000; Shiftan et al., 2003;Akerman and Hojer, 2006)

• Taking the most important factor in CO2 emissions

• Scenario related to any other fiscal measure except tax

• Taking into account revenue recycling (counter of regressive effect)and Jevons effect


• Carbon tax is suggested by Arthur C. Pigou (1920)

• Optimal tax rate should be equal to the marginal social cost of damagesfrom an additional unit of emission based on Ramsey formula (1927)

Determining the Optimal Tax Rate


Research Problems


Effective Tool

from an additional unit of emission based on Ramsey formula (1927)

• Marginal damages change with emissions, the tax rate needs to change aswell

• Experiences also suggest that carbon tax rate should increase every year.Because with increased economic development people’s capacity to affordenvironment damage will increase


Different carbon tax rates in India

• Fisher-Vanden et al. (1997) developed three cases for different tax rates• Case 1- a tax of $40 per ton of carbon in 1995 which rises steadily until 2015

• Case 2- $8 per ton in 2005 and rise quickly to $162 per ton by 2030 when carbon emission will notincrease two times the 1990 level for the period 1995 to 2015.

• Case 3- when carbon emission will not increase three times the 1990 level for the same period, no tax


Research Problems


Effective Tool

• Case 3- when carbon emission will not increase three times the 1990 level for the same period, no taxrate requires until 2020, but at this time a $2 per ton tax rate is required to stabilize carbon emissions asper the required level

• Zhao et al. (2012) proposed three carbon tax $14.02/tCO2, $40.65/tCO2, and$77.92/tCO2 in order to internalize the social cost of CO2 emission

• Tol (2012) calculated maximum carbon tax as $45/tCO2 in short run12/4/2014 Monika Gupta 33

Conclusion and

Future Research Problems


Research Problems


Effective Tool



• Behavioural attributes including awareness and technological innovation aretwo most important aspects to reduce GHG emission from transport sector

• To design any monetary measure and policy framework, people’s willingnessto pay is important to know


Research Problems


Effective Tool

to pay is important to know

• Carbon tax is an effective instrument to reduce air pollution

• But people support taxes only when they got ensured that the tax proceedingis actually helping in combating air pollution

• Therefore to ensure the transparency and accountability of the use ofrevenue collected from carbon tax, is important. Revenue recycling may behelpful in this context


• To gauge people’s awareness, responsiveness and willingness topay to the problem of CO2 emissions from road transport sector



Research Problems


Effective Tool

2

• To identify and decompose the factors responsible for changes inCO2 emission from transport sector such as vehicle activity (PKm,travel behaviour), mode share, fuel intensity, emission intensity,vehicle ownership, economic growth, etc.


• To analyze fuel taxes as an important market mechanism forcombating CO2 emission and their distributional effects

a) To determine and analyse optimal carbon tax rate for road transport in


Research Problems


Effective Tool

a) To determine and analyse optimal carbon tax rate for road transport inIndia

b) To study CO2 emissions reduction potential and mitigation opportunitiesin different scenarios

• In case of India, potential of congestion charges as carbon tax cabbe explored


Questions/ Suggestions/Feedback

Thank You

Carbon tax rates in different countries

Country Year Adopted Rate (in $ per ton of co2) Annual Revenue

Denmark 1992 $9-$18 $560 million (1993)

As against Indian carbon tax rate (Rupees 50 per ton of coal) in 2010, many countries have started

levying carbon tax since early 1990s with comparatively high rate. Following table presents few

examples of tax rates in different countries.

Finland 1990 $8 + 21¢/ gjoule $314 million (1994)

Netherlands 1990 $16.4 + 91¢/giga-joule $850 million (1995)

Norway 1991 $15-$47 $900 million (1994)

Sweden 1991 $27-55 $1.7 billion (FY93-4)


Sources: Muller (1996); OECD (1996); Netherlands Ministry of Housing, Spatial Planning and Environment.

Few Important Concepts/Definitions

(2)

Terminology Definitions Used in the literature

Rebound

effect (Jevons

paradox)

Efficiency improvements often backfire and lead to use of more resources. It

raises fuel efficiency, reduces per-mile fuel cost of driving and hence cause an

increase in vehicle usage because people’s disposable income is constant;

therefore, travel increase due to lower cost might partially offset the benefits.

Proost (2008), Wagner & Lee

(2012), Hymel et al. (2010)

Revenue

recycling/

A combination of “carrot and stick”, i.e., the use of charges and compensation

together. It worked as an incentive to effectively reduce CO2 emission and

Xie et al. (2004), Zhang &

Baranzini (2004), Bureau

double

dividend

together. It worked as an incentive to effectively reduce CO2 emission and

eliminate polluting vehicles. There should be a net economic benefit (double

dividend). Revenue Recycling effectively change the distributional effect of fuel

taxes which were regressive. Double Dividend depends on the balance between

economic losses caused by the ecological taxes and the benefits accruing from the

revenue recycling.

(2011),

Patuelli et al. (2005)

Fee bates An instrument of revenue recycling where a combination of fees and rebates

(taxes or subsidy) designed for revenue neutralization. It would help to balance

the social effects of a carbon tax.

Proost & Dender (2012),

Small (2007), Greene et al.

(2005), Michaelis & Davidson

(1996), Davis et al. (1995)12/4/2014 Monika Gupta 41

(3)Terminology Definitions Used in the literature

ASIF approach Essentially, transportation energy use is a function of total activity (A), mode share (S), fuel

intensity (I), and fuel type (F). These are the four basic components which drive transport

energy consumption and GHG emission. This approach will help in decomposing the effect

of above factors for changes in CO2 emission.

Schipper et al. (2000, 2009),

Zegras (2007)

Avoid-shift-

improve

(1) Avoid unnecessary trips (reducing the distances driven or the number of trips taken), (2)

shift to more sustainable transport modes (reducing emissions per passenger unit), and (3)

Dalkmann and Brannigan

(2007), Leather & Team

Few Important Concepts/Definitions

improve

framework

shift to more sustainable transport modes (reducing emissions per passenger unit), and (3)

improve performance in all modes (reducing emissions per kilometre driven per vehicle).

This framework is significant in determining the behavioural aspect for travel activity.

(2007), Leather & Team

(2009), Bandyopadhyay, and

Thukral (2010), Planning

commission (2011)

Back casting

approach

Scenarios are designed as “images of future”. In this approach, ideal images of the future

are determined and then paths between current scenario and future idealized scenario are

found. Back casting approach tries to get the answers of the question, how can a specific

target be met? It is to a great extent directed towards finding trend-breaks and possible

alternative paradigms that might be necessary in order to achieve the target set.

Shiftan et al. (2003), Hojer

and Mattsson (2000),

Akerman and Hojer (2006)


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