Back Matter
Author: Ian Parry1
  • 1 https://isni.org/isni/0000000404811396, International Monetary Fund

Annex I. Spreadsheet Tool for Analyzing Carbon Pricing

IMF staff have developed a spreadsheet model providing, on a country-by-country basis for 150 countries, projections of fossil fuel CO2 emissions and assessments of the emissions, fiscal, economic, public health and other impacts of carbon pricing and other mitigation policies.

This tool starts with use of fossil fuels and other fuels by the power, industrial, transport, and household sectors and then projects fuel use forward using:

  • Projections of GDP;

  • Assumptions about the income elasticity of demand and own-price elasticity of demand for electricity and other fuel products;

  • Assumptions about the rate of technological change that affects energy efficiency and the productivity of different energy sources; and

  • Changes in future international energy prices.

In these projections current fuel taxes and carbon pricing are held constant in real terms.

The impacts of carbon pricing and other mitigation policies on fuel use and emissions depends on: (i) their proportionate impact on future energy prices; (ii) a simplified representation of fuel switching within the power generation sector; and (iii) various price elasticities for electricity use and fuel use in other sectors.

The model is parameterized using data compiled from the International Energy Agency (IEA) on recent fuel use by country and sector and carbon emissions factors by fuel product. Data on energy taxes, subsidies, and prices by energy product and country is from IMF sources. Prices are projected forward using a combination of 2020 prices (50 percent weighting) and an average of IEA, US Energy Information Administration, IMF and World Bank projections for international energy prices (50 percent weighting). Assumptions for fuel price responsiveness are chosen to be broadly consistent with empirical evidence and results from energy models.56

One advantage of the model is its flexibility in incorporating a large number of countries, a wide range of alternative mitigation policies (e.g., comprehensive and partial carbon pricing, taxes on electricity and individual fuels, feebates and other policies to improve energy efficiency and reduce emission rates), and sensitivity analyses with respect to parameter values and policy stringency. Another advantage is that the model is highly transparent as differences across policies and countries can be explained in terms of basic economic concepts that are familiar to policymakers.

One limitation of the model is that, for analytical tractability, it does not explicitly incorporate the gradual turnover of energy capital which limits the response of fuel use to pricing in the short to medium term (e.g., while vehicle fleets turn over). This assumption is reasonable, however, given the focus on longer term policies for 2030, which presumably are anticipated and phased in progressively (nearer-term impacts of policies are analyzed using smaller energy price elasticities). The model abstracts from the possibility of mitigation actions (beyond those induced by current policies) in the BAU, which is a common approach to provide clean comparisons of mitigation instruments to the BAU. More detailed modelling of prospective policies may be needed at the national level however, as individual countries tailor their own, idiosyncratic strategies to implement mitigation objectives.

Another caveat is that, while the assumed fuel price responses are plausible for modest fuel price changes, they may not be for dramatic price changes that might drive major technological advances, or non-linear adoption of technologies like carbon capture and storage. The model also does not account for the possibility of upward sloping fuel supply curves, general equilibrium effects (e.g., changes in relative factor prices that might have feedback effects on the energy sector), and changes in international fuel prices that might result from simultaneous mitigation action in large emitting countries. However, parameter values in the spreadsheet are chosen such that the results from the model are broadly consistent with those from far more detailed energy models that take these sorts of factors into account. 57

Annex II. Miscellaneous Emissions Sources

This Annex briefly discusses emissions from waste and fluorinated gases, the most important of which is hydrofluorocarbons (HFCs).

For emissions leakage from waste sites (due to the bacterial decomposition of organic waste) the case for fiscal instruments over regulation is less compelling. One reason is that landfills are predominantly managed by the public sector. Another is that mitigation responses are limited— they include capturing the methane for flaring, for use in energy, and diverting waste for recycling and re-use—and are relatively straightforward to specify in regulation. Indeed, the EPA finalized standards to reduce methane emissions from new, modified, and reconstructed municipal solid waste landfills in 2016 though requirements were postponed in 2019.

HFCs could be progressively phased out through taxation. These chemicals, which are used in refrigerants, foams, aerosols, and fire extinguishers, were developed as a substitute for ozone-depleting chemicals but have warming potentials hundreds of times higher than CO2. Unlike other GHGs in the Paris Agreement, HFCs have other international negotiations—under the 2016 Kigali Agreement, advanced countries are required to reduce HFCs 85 percent (relative to 2011–2013 levels) by 2036 (though the United States has not yet ratified the treaty). In 2015, the United States prohibited HFCs for uses where acceptable alternatives were available, however enforcement of this rule was suspended in 2018. Phasing in a tax on HFCs (in proportion to the global warming potential of the gas) would be an administratively straightforward way to progressively reduce their use and would be a more flexible than a regulatory approach.58

Annex III. Burden of Carbon Mitigation Policies on Industries

Conceptual Analysis

The burden—or increase in private production costs—for industries from carbon mitigation policies is depicted graphically in Figure A1. Here the upper, middle, and lower curves are respectively the marginal cost of reducing emissions through reducing domestic industry output, reducing the emissions intensity of output and the envelope of these two curves. A carbon pricing policy reduces emissions by ∆Etot, with ∆Eint and ∆Eout coming from reduced emissions intensity and reduced output respectively.

Figure A1.
Figure A1.

Burden of Carbon Mitigation Policies on Industry

Citation: IMF Working Papers 2021, 057; 10.5089/9781513571003.001.A999

The burden of carbon pricing on industries has two components. One is the economic efficiency cost of the behavioral responses (the red triangle in Figure A1) reflecting the resource cost of adopting cleaner (but costlier) production methods. The other is the transfer payment, for example, payments to the government for emission allowances to cover remaining emissions (the blue rectangle).

Alternative mitigation instruments to carbon pricing are less efficient but may impose a much smaller burden on industries. A feebate applied to an industry reduces emissions intensity but (to an approximation) has no impact on output as, unlike a carbon price, it does not charge for remaining emissions. A higher price on emissions is therefore needed to achieve equivalent emissions reductions as under pure carbon pricing, and this implies a higher efficiency cost (the extra green triangle in Figure A1). Under the feebate however there is no transfer payment—the overall burden is therefore generally lower under the feebate.

Illustrative Impacts of Carbon Pricing and Feebates on Production Costs for Steel and Cement

Steel. Traditionally steel is produced using an integrated process involving heating coal to form coke, feeding coke and iron ore into a blast furnace, and using an oxygen furnace to purify the molten metal—the process produces about two tons of CO2 per ton of steel.59 Alternatives include an electrified process using scrap metal, and emerging technologies—for example, applying CCUS, or feeding an electric furnace with iron made by direct reduction (e.g., using natural gas). These alternatives produce CO2 emissions of about 0.3–0.4 tons per ton of steel.

A carbon price of $50/ton of CO2 would increase the cost of integrated production by about $100/ton of steel through the firs t-order transfer payment, about one sixth of recent steel prices.60 And it would increase the cost under alternative technologies by about $20/ton of steel.61 In contrast, under a feebate the cost for integrated production (given an assumed industry average emission rate of 1 ton of CO2 per ton of steel) would increase $50 per ton of output, while alternative technologies would receive a subsidy of about $30 per ton of output.

Cement. About 90 percent of cement is produced using traditional kilns to decompose calcium carbonate into clinker and CO2 and then using mills to mix clinker with other minerals like limestone and grinding it—the process produces about 1 ton of CO2 per one ton of cement, with process emissions contributing about 70 percent of these emissions. Alternatives include state-of-the-art plants in terms of energy efficiency, currently about 10 percent of production, and CCUS—either post-combustion (where CO2 is extracted from exhaust gases) or oxy-combustion (where fuel is burned with a mixture of pure oxygen and exhaust gases). State-of-the-art plants largely eliminate non-process emissions. Post- and oxy-combustion reduce emissions about 55 and 85 percent respectively, while increasing capital costs by about 25 and 100 percent respectively.

A carbon price of $50/ton of CO2 would increase the cost of traditional production about $50 per ton of cement, or about 40 percent,62 while increasing the price of more efficient and CCUS-fitted plants by $30, and $8–25 per ton of output respectively through the first-order transfer payment. In contrast, a feebate with price $50/ton of CO2 would only increase the cost of traditional production by $5 per ton of cement, while providing a subsidy to more efficient and CCUS-fitted plants of $10 and $18–35 per ton of output.

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1

The author is grateful to Christian Bogmans, Nigel Chalk, Jean Chateau, Cory Hiller, Andrea Pescatori, James Roaf, and Gregor Schwerhoff for very helpful comments and to Khamal Clayton and Danielle Minnett for first-rate research assistance.

3

The United States’ original submission for the Paris Agreement was to reduce GHGs 26-28 percent below 2005 levels by 2025. On current policies it will fall somewhat short of this pledge (see below).

6

For example, runaway warming from feedback effects, collapsing ice sheets (see IPCC 2019a, Table 6.1, McSweeney 2020).

7

For example, IMF (2019a, Figure 1.4) put local environmental benefits—principally reductions in local air pollution mortality—from a $50 carbon price in 2030 at 0.2 percent of GDP compared with economic efficiency costs (losses in consumer and producer surplus in fossil fuel markets) of 0.1 percent. Reducing local air pollution can also increase labor productivity (e.g., Graff Zivin and Neidell 2012). US GDP losses for a similarly scaled carbon tax in 2030 with revenues used to substitute for labor income taxes, are put at 0.3 percent on average across six energy models, or about twice as large if revenues are used for lump-sum dividends (see Goulder and Hafstead 2018, Table 5.2, and below).

9

Gross emissions can be positive, if they are offset by negative emissions (e.g., from reforestation, direct removal of CO2 from the atmosphere).

10

The ratio of federal debt to GDP has increased from 35 percent in 2007 to a projected 98 percent for 2020 and 142 percent for 2040 (CBO 2020).

12

Public investment, technology, and regulatory policies are largely beyond the paper’s scope. On the Public investment, technology, and regulatory policies are largely beyond the paper’s scope. On the former, IMF (2020) find that deficit-financed public investment in clean energy infrastructure can boost output and employment in the current context of low long-term interest rates and recovery from the pandemic-induced crisis while, in the presence of carbon pricing, catalyzing private investment in clean technologies. For a discussion of US technology policies see Newell (2015) and on regulatory policies Burtraw and Palmer (2015) and Krupnick and others (2010).

13

EIA (2020) projects US CO2 emissions are flat to 2050 undercurrent policies. The focus year of the analysis below is largely 2030 given that most countries have set intermediate targets for that year.

15

In 2007, the Supreme Court remanded the matter to EPA, but expressly didn’t reach the question of whether EPA must make a finding that GHGs endanger public health or welfare, or whether policy concerns may inform EPA’s actions in the event that it makes such a finding. See www.justice.gov/enrd/massachusetts-v-ep.

16

Nine legislative proposals for a federal carbon tax have been put forward by various representatives and senators in the US Congress since 2018 (for a comparison of their design features see www.energypolicy.columbia.edu/what-you-need-know-about-federal-carbon-tax-united-states). For example, the Energy Innovation and Carbon Dividend Act, which is the first bipartisan climate legislation in a decade, was introduced as H.R.763. The bill includes a carbon fee on fossil fuel suppliers with rate beginning at $15 in 2019 per ton and rising at $10 per ton each year, a BCA, and return of revenues in dividends to households. The main attempt to pass a federal ETS in the United States was the ‘Waxman- Markey’ bill which passed the House in 2009 but did not make the floor of the Senate. President Biden has pledged not to raise taxes on individuals earning less than $400,000 a year though this refers to income taxes rather than direct taxes.

17

Taxes could be applied after fuel processing, or upstream as part of the fiscal regime for extractive industries (a small coal tax already exists to fund compensation for black lung disease)—in the latter case, imports should also be covered, and rebates provided for exports. See Calder (2015).

18

As in, for example, California or the national ETS starting in Germany in 2021.

19

Again, as in California where the floor price is implemented through a minimum price for auctioned allowances.

20

For further modelling results on US carbon taxes see Barron and others (2018).

21

Emissions leakage refers to the increase in emissions in other countries that partially offset domestic emissions reductions—a potential channel for leakage is increased imports in response to contraction of EITE industries. Some studies suggest leakage rates are modest (e.g., Branger and others 2017, Koch and others 2019) while IMF (2021) estimates more sizable leakage rates for some countries but a relatively modest rate of 5 percent in the case of the United States.

22

The position under WTO trade rules is complex but those rules do not arguably prohibit countries with carbon taxes from adopting non-discriminatory harmonizing measures (such as BCAs) which would reduce the competitive disadvantage that EITE industries face from exports from countries that do not tax carbon emissions (e.g., Flannery and others 2020). However, the position is even more complex when measures specifically seek to rely on permitted exceptions. In this specific case, only reducing carbon leakage is likely to be a legally permissible justification potentially fall within the environmental exception for trade measures like BCAs under GATT Article XX and not protecting competitiveness—limiting the BCA to EITI industries likely further enhances the prospects for legality of permissibility within that exception under trade law (e.g., Flannery and others 2020). This is because trade measures based on environmental exceptions would not be permissible if they result in arbitrary discrimination or disguised restrictions on trade.

23

Worldwide, only one BCA has been implemented to date, applying to the embodied carbon in imported electricity under California’s ETS (e.g., Pauer 2018).

24

See, for example, Fischer and others (2015) for a full discussion of assistance measures for EITE industries.

26

See Dinan (2015) for a comparison of mechanisms at the federal level for compensating low-income households including income and payroll tax rebates, incentives for energy-saving investments, increasing the Earned Income Tax Credit, and strengthening the Supplemental Nutrition Action Program (food stamps) and Low-Income Home Energy Assistance Program. Assistance measures at the state level could also be strengthened. Klenert and others (2018) provide a conceptual discussion of equitable recycling. Measures for displaced workers could center around extended unemployment benefits, training and reemployment services, and financial assistance related to job search, relocation, and health care (see Morris (2016). All these household and worker programs need only absorb a modest fraction of carbon pricing revenues. And on balance, employment gains in clean energy jobs are expected to outweigh employment losses in carbon-intensive sectors (e.g., Garrett-Peltier 2017).

27

Public investment should focus on infrastructure networks (e.g., high voltage transmissions lines to renewables sites in the Great Plains and Southwest, EV charging stations, energy efficient public buildings, pipelines for CCUS) which would be underprovided by the private sector. Technology policies can address knowledge spillovers at various stages during the process of developing, demonstrating, and deploying clean technologies (e.g., Newell 2015, Dechezleprêtre and Popp 2017), especially critical technologies that are currently far from the market (e.g., electricity storage, green hydrogen).

28

This is despite a strong case on broad environmental and fiscal grounds for substantially higher fuel taxes (e.g., Parry 2011).

29

See www.nhtsa.gov/corporate-average-fuel-economy/safe. The old and new would cut 2030 emissions of the on-road fleet about 23 and 16 percent respectively (assuming a vehicle life of 15 years and current on-road fuel economy of 30 mpg).

30

Vehicle manufactures are therefore rewarded for going beyond prevailing fuel economy standards (and penalized for not meeting them)—in this way, the feebate reinforces the CAFE program.

31

For comparison, a 2015 Honda Fit, Toyota Camry XV70, and Ford ranger T6 currently have mpgs of 49, 41, and 31 respectively or CO2 emission rates of 181, 217, and 287 g CO2 per mile respectively.

32

Promoting electricity conservation is still important, even if power generation were fully decarbonized, to ensure demand/supply balance given constraints on renewable generation sites.

36

Including satellites, aircraft, drones, and remote sensing from vehicles.

40

There are however various conservation, grant, and technical assistance programs for forestry and agriculture that can indirectly promote sequestration (e.g., USDA 2016).

41

See Parry (2020) for details.

42

Periods might be defined as averages over multiple years given that carbon storage might be lumpy during years when harvesting occurs.

43

Partial exemptions from fees may be warranted for timber harvested for wood products (e.g., furniture, houses) because the carbon emissions (released at the end of the product life) will be delayed, perhaps by several decades or more.

44

Calculation assumes the planting sequesters an additional 3 tons of CO 2 each year over a 20-year growth cycle with payments discounted at 5 percent. Agricultural land values were equivalent to $7,500 per hectare in 2019 (USDA 2019).

45

See Mendelsohn and others (2012), Parry (2020) for further discussion of design issues for feebates.

46

Emissions shares are from CAT (2020).

49

Basing the feebate on emission rates per hectare could be problematic because livestock is land intensive but the emissions per hectare could be smaller than for crops. The feebate could be disaggregated with higher pivot points for beef producers and lower pivot points for crop producers—this might enhance acceptability (by lowering fees for the former) though it would lower incentives to switch from livestock to crop operations.

51

Updated from IMF (2019a).

53

See Parry (2020) for further discussion.

54

See Parry and others (2020) for discussion of the rationale for modified feebates for the maritime sector, their design, and quantitative impacts.

55

The current offset price is below $1 per ton of CO2 and large offset prices that pass an additionality requirement seem unlikely for the foreseeable future (e.g., Fearnehough and others 2018). International offsets also run the risk of being double counted by both the seller and buyer of the offset towards their mitigation commitments in which case they may not reduce global emissions.

56

See IMF (2019b), Appendix III, for a mathematical description of the model and documentation of parameter values.

57

IMF (2019b), Appendix III.

58

Denmark, Norway, Poland, Slovenia, Spain, for example, have implemented these taxes with rates equivalent to around US$5–40 per tonne of CO2 equivalent (e.g., Brack 2015).

59

Unless otherwise noted, all data in this box is taken from van Reijven and others (2016).

61

Technology switching is more likely to take the reform of retrofitting existing plants, rather than scrapping plants and building new ones, given that existing steel factories can potentially produce for several decades. Incentives will vary across plants, for example with local fuel and electricity prices..

62

Cement prices are currently around $125 per ton (www.ibisworld.com/us/bed/price-of-cement/190).

Implementing the United States’ Domestic and International Climate Mitigation Goals: A Supportive Fiscal Policy Approach
Author: Ian Parry