Explicit and implicit carbon pricing of different instruments

at the EU level

Luis Rey Bilbao

October 23, 2015

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How do we measure static efficiency?

Ideally, the static efficiency is assessed in terms of how successful the current policy mix is in equalising the marginal abatement cost across sectors and across emitters.

This measure is typically approximated through the carbon price: the policy mix is statically efficient if it succeeds in generating a uniform carbon price across sectors and emitters.

Carbon prices can be explicit, such as the carbon price of the EU ETS, or implicit.

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Carbon price of the EU ETS

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Implicit carbon price: financial support by technology divided by the amount of CO2 emissions avoided.

Example: average support is 50 €/MWh and emissions account for 0.5 tCO2/MWh. This implies an implicit carbon price of 100 €/tCO2.

Average financial support by technology is obtained from CEER database.

The amount of CO2 avoided:

National mix (excluding renewables)

EU mix (excluding renewables)

Natural gas

RES support mechanisms in the electricity sector

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Hydro Wind Biomass Biogas PV Geo-

thermal Waste

Czech Republic 83.2 21.1 59.3 166.2 790.4 :: ::

France 133.2 385.2 536.8 420.7 5381.0 :: ::

Germany 67.4 77.6 228.6 :: 733.8 294.5 ::

Italy 149.9 142.1 224.8 :: 759.5 153.8 ::

Netherlands 224.9 185.4 171.0 :: 890.2 :: 111.3

Spain 124.8 129.2 219.8 :: 1134.3 :: 84.5

United Kingdom 131.0 145.4 129.5 127.6 416.7 :: ::

RES-E support mechanisms: Implicit carbon price (€/tCO2) (2010). National Mix

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Hydro Wind Biomass Biogas PV Geo-

thermal Waste

Czech Republic 97.5 24.7 69.5 194.8 926.2 :: ::

France 22.9 66.3 92.3 72.4 925.7 :: ::

Germany 66.5 76.6 225.6 :: 723.9 290.5 ::

Italy 149.9 142.0 224.7 :: 759.2 153.8 ::

Netherlands 183.7 151.5 139.7 :: 727.2 :: 90.9

Spain 82.1 85.0 144.6 :: 746.3 :: 55.6

United Kingdom 117.1 129.9 115.8 114.0 372.5 :: ::

RES-E support mechanisms: Implicit carbon price (€/tCO2) (2010). EU Mix

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Hydro Wind Biomass Biogas PV Geo-

thermal Waste

Czech Republic 143.2 36.3 102.0 285.9 1359.8 :: ::

France 33.6 97.3 135.6 106.2 1359.0 :: ::

Germany 97.7 112.5 331.2 :: 1062.8 426.5 ::

Italy 220.0 208.5 329.9 :: 1114.5 225.8 ::

Netherlands 269.8 222.4 205.0 :: 1067.6 :: 133.5

Spain 120.6 124.8 212.4 :: 1095.7 :: 81.7

United Kingdom 172.0 190.8 170.0 167.4 546.9 :: ::

RES-E support mechanisms: Implicit carbon price (€/tCO2) (2010). Natural Gas

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Implicit carbon price: excise tax per unit of energy product divided by the CO2-eq emissions per unit.

Example: excise tax is 0.5 €/litre and emissions account for 2 kgCO2/litre. This implies an implicit carbon price of 250 €/tCO2.

Taxes are obtained from the IEA and emission factors from the IPCC.

Energy taxes

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Energy taxes: Implicit carbon price (€/tCO2) (2012).

Electricity Natural gas Diesel Unleaded

gasoline

Light

fuel oil LPG

Industry Households Industry Households

Czech Republic 1.91 2.03 6.03 0.00 163.61 222.40 9.86 53.10

France 212.41 299.49 7.23 5.50 151.10 248.71 20.86 37.09

Germany 72.67 160.52 19.95 27.23 175.71 270.36 22.94 56.87

Italy 196.11 152.04 21.79 ::: 230.74 316.01 151.28 90.87

Netherlands 30.84 18.77 13.37 84.42 162.02 318.20 ::: 58.11

Poland 6.12 6.12 0.00 0.00 129.19 175.54 20.73 68.25

Spain 21.85 36.76 0.00 0.00 133.26 191.20 31.20 19.78

United Kingdom 7.55 0.00 4.40 0.00 263.54 312.09 50.62 :::

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What happens if we include other externalities?

We include data from the IMF on air pollution, accidents…

Excise tax (€/litre)

local air pollution (€/litre)

congestion(€/litre)

Accidents (€/litre)

road damage (€/litre)

Implicit Carbon Price

(€/tCO2)

Czech

Republic 0.4366 0.139 0.178 0.103 0.041 -9.670

France 0.43 0.128 0.391 0.101 0.039 -84.400

Germany 0.47 0.154 0.302 0.077 0.026 -33.069

Italy 0.606 0.146 0.217 0.116 0.026 37.942

Netherlands 0.44028 0.121 0.409 0.068 0.010 60.408

Poland 0.35461 0.098 0.107 0.164 0.012 -13.215

Spain 0.361 0.164 0.343 0.085 0.030 -94.172

United

Kingdom 0.67415 0.091 0.356 0.050 0.026 72.019

DIESEL

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Excise tax (€/litre)

local air pollution

congestion accidents Implicit

Carbon Price (€/tCO2)

Czech

Republic 0.511 0.008 0.189 0.151 70.973

France 0.604 0.008 0.373 0.112 47.289

Germany 0.655 0.008 0.287 0.085 113.385

Italy 0.717 0.007 0.207 0.129 163.110

Netherlands 0.736 0.007 0.390 0.076 113.887

Poland 0.398 0.009 0.114 0.239 15.657

Spain 0.457 0.015 0.326 0.094 8.866

United

Kingdom 0.715 0.004 0.339 0.056 137.781

GASOLINE

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Conclusions

There is little harmonisation in the promotion of renewables and energy taxes at the EU level.

The implicit carbon price set by the different policies, vary widely.

In the long-term, in order to maximize the static efficiency of the EU climate instrument mix, the implicit carbon price set by the different policies should convergence with the carbon price of the EU ETS.